Commercial Property News December 2019 Compiled by Hayven Property Tax
Commercial property is always a very newsworthy topic. Here is a roundup of the latest news (December 2019) concerning commercial property and investments in the UK, including which the 2020 vision fro commercial property data.
Think carefully about how you get exposure to UK commercial property
More than three years on from the vote to leave the European Union (EU), investors remain highly uncertain about the form and timing of the UK’s departure from it. And although the effect of uncertainty on prices could translate into big gains for domestic-facing assets if the picture becomes clearer, it has triggered the return of a familiar problem for investors who hold open-ended UK property funds, reports David Baxter in Investors Chronicle.
M&G Property Portfolio(GB00B89X8P64), a fund with assets under management of £2.5bn, suspended trading earlier this month. M&G Investments said that it had been subject to “unusually high and sustained” investor outflows in recent months, at a time when Brexit-related political uncertainty and structural shifts in the UK retail sector have made it difficult to sell commercial property. Prudential (PRU) has also suspended a smaller fund that invests in M&G Property Portfolio.
However, concerns centre on other large open-ended property funds and whether these are also at risk of suspension. M&G Property Portfolio was just one of seven open-ended property funds to temporarily suspend trading in 2016 when uncertainty triggered by the vote to leave the EU made it difficult to sell a property and prompted nervous investors to withdraw from property funds. Although net outflows from M&G Property Portfolio have been particularly high this year, amounting to about £901m in the first 10 months of this year alone, other funds have also experienced redemption requests, just as properties may become even harder to sell. The news of M&G Property Portfolio’s suspension could also prompt investors in other funds to rush for the door and once a fund struggles to sell assets quickly enough to return cash to investors, the suspension of trading becomes highly likely.
Any sign of greater clarity around Brexit could prompt an uplift for UK assets, rejuvenating parts of the UK property market and encouraging investors to put money into or stick with open-ended commercial property funds. But to provide a snapshot of how the funds that suspended trading in 2016 have been faring in less certain times, we have outlined their size at the end of October and the net outflows that they endured over the first 10 months of this year, as well as recent performance.
Commercial property funds suspended from trading in 2016
|Fund||Size||2019 net outflow to end October||Cash allocation (%)||Year to date performance, as of 6 December (%)|
|Aberdeen UK Property||£1.4bn||£610m||12.7||-6.5|
|Aviva Investors UK Property||£542m||£235m||30.9||-6.3|
|Janus Henderson UK Property||£2.2bn||£236m||16.7||2.7|
|Canada Life UK Property||£381m||N/D||8.9||-0.5|
|M&G Property Portfolio||£2.5bn||£901m||5||-7.5|
|Standard Life Investments UK Real Estate*||£1.8bn||£107m||16.3||-1.2|
|Threadneedle UK Property||£1.2bn||£322m||6.3||0.5|
Source: fund providers, FE Analytics, Morningstar. Size and cash weighting as of end October unless otherwise stated
*Size and cash position from the end of September
Only two of the seven funds that suspended trading in 2016 made a positive return in the past 11 months and they have also experienced redemption requests from investors. Data is not available for Canada Life UK Property (GB0032040254), but the other funds have had to deal with net outflows of between £107m from Standard Life Investments UK Real Estate (GB00BYPHP643) and £901m from M&G Property Portfolio. Relative to their overall size, Standard Life Investments UK Real Estate and Janus Henderson UK Property (GB00BP46GG64) have had more modest outflows, amounting to less than a tenth of their assets at the start of this year.
But other funds look more vulnerable. Aberdeen UK Property(GB00BTLX1G31), the second-worst performer in the group, experienced net outflows of £610m over the first 10 months of this year, according to fund data company Morningstar. This represents a large chunk of the fund – around 30 per cent of its assets at the start of 2019. Although its outflows have been lower, Aviva Investors UK Property (GB00BYYYZ110) is also roughly a third smaller than at the start of this year. And net outflows from Threadneedle UK Property (GB00BQ3G0Z13) have left it around 20 per cent smaller.
Based on these figures, Aberdeen UK Property and Aviva Investors UK Property look most exposed to potential difficulties in meeting investor redemptions if these persist or escalate.
But it is also important to note how much cash each fund has been holding in recent months. Funds that hold high levels of cash may sacrifice some yield and return because they are not fully invested, but this can also be a good way to meet redemptions in difficult times. If commercial property is proving slow or difficult to sell, property fund managers can use their cash holdings to meet investor redemptions.
Low cash levels arguably heightened the need for M&G Property Portfolio to suspend trading: it had around 10 per cent of assets in cash over the summer, but by the end of October this had fallen to just 5 per cent – possibly because its managers were using the cash to meet redemptions.
Many of this group of seven funds have been running reasonably high cash levels. Aviva Investors UK Property had more than 30 per cent of its assets in cash at the end of October, while Aberdeen UK Property, Janus Henderson UK Property and Standard Life Investments UK Real Estate had double-digit allocations. Threadneedle UK Property had the lowest allocation to cash of just 6.3 per cent of its assets.
A substantial allocation to cash arguably lessens the likelihood of further suspensions, but this also depends on whether investors rush for the door and how long outflows last. And because a high cash allocation can be detrimental to the performance you should consider why exactly you want to hold such a fund.
Ben Yearsley, director at Shore Financial Planning, says: “Property continues to act as a diversifier, but the next few years are likely to see little or no capital growth. With many open-ended UK direct property funds holding upwards of 25 per cent cash, total returns could be in the 2 to 3 per cent range for a while.”
Although investors have some idea of how more popular open-ended property funds are faring and are positioned for redemption requests, the suspension of M&G Property Portfolio is a reminder that exposure to illiquid assets comes at a price and should be monitored closely.
“While dealing suspensions are clearly unwelcome, investors should always be prepared for this risk, particularly with the most illiquid and long-term asset classes,” says Peter Toogood, chief investment officer at fund rating agency The Adviser Centre.
Louis Tambe, a fund analyst at FE, adds: “It shows that liquidity issues can creep up on investors. [Redemption requests] might have started due to Brexit worries and continued due to challenges in the retail sector, forcing [M&G Property Portfolio] to sell assets and lock in losses, which further compounds the issue. This shows that liquidity needs to be monitored regularly – not just ahead of key events.”
Fund suspensions can cause difficulties when it comes to changing or rebalancing your overall portfolio as you cannot change allocations to the affected funds. If a fund manager is forced to sell assets to raise cash this could also be detrimental to performance, although the impact is likely to be minimal if you have a diversified portfolio and limit on your allocation to such funds.
And fund suspensions can be successfully managed: all the property funds that suspended in 2016 went on to resume trading within about six months, and UK commercial property could benefit from any Brexit-related bounce in sterling.
M&G has also reduced M&G Property Portfolio’s annual charge by 30 per cent while it is suspended and investors in it will continue to receive income payments.
The Financial Conduct Authority supports suspending funds from trading in certain circumstances, so there could be more of these in future. But if you wish to avoid the uncertainty of a fund you hold being suspended, one option is to get exposure to property via a closed-ended investment trust instead.
But this also incurs some issues. Investment trust managers are not forced to sell assets to meet redemptions when investors take their money out of them because you cannot sell your shares in a trust back to it. If you want to dispose of your holding you have to sell it to other investors on the secondary market. But if a trust is out of favour this will push its share price down so, although you might be able to dispose of your holding in it by selling your shares, you may have to do so at a great loss. However, as we discussed last week, depressed share prices can represent an opportunity for patient investors who see merit in the underlying assets.
Twelve out of 14 direct property investment trusts were trading at a discount to net asset value (NAV) as of 9 December, according to broker Winterflood. And nine of these were on a wider discount than their 12-month average rating, which perhaps reflects the gloomy sentiment of recent months. The average discount to NAV for these trusts was 7.7 per cent, compared with their 12-month average of 5.7 per cent.
Custodian Reit(CREI), by contrast, was on a 10.4 per cent premium, the same as its 12-month average rating. And LXI Reit(LXI) was on a premium of 13.9 per cent, higher than its 12-month average rating of 10.7 per cent.
Analysts at Investec have made the case for investing in Ediston Property Investment Company(EPIC), whose shares trade at a wider discount to NAV than their 12-month average of 13.3 per cent. This trust is exposed to the retail sector but invests in areas other than the beleaguered high street.
If you prefer the convenience of an open-ended fund and fewer liquidity worries you could invest in a fund that holds both physical properties and shares in property companies. BMO Property Growth and Income(GB00BQWJ8794), for example, had around a quarter of its assets in direct property at the end of October, alongside significant exposure to property shares listed in the UK and Europe.
2020 Vision For Property Data
In commercial property, data is helping estate agents, surveyors, developers and investors better identity as well as understand the potential opportunities and challenges within the market.
Interested in commercial property data, commercial property agents SavoyStewart.co.uk surveyed 468 commercial property professionals to discover the types of data they believe is they need more of in 2020
Savoy Stewart found that the majority of commercial estate agents (74%) would like to access data where they can easily see the approval and refusal rate of commercial property planning permissions for any UK postcode.
Thereafter, 69% think there needs to be improved data when trying to identify the average price per square foot that commercial properties have sold for in any given area.
Similarly, 63% desire data that will allow them to determine the average asking price per square feet that commercial properties in any set location are commanding.
Interestingly, 51% would like to gain more data that highlights commercial property crime statistics for different postcodes across the UK. Whilst, 40% feel the same about data that will enable them to more accurately assess the average internet speeds by UK postcodes.
On the other end, 32% feel more data is required on 5-year capital growth projections for commercial property in any given UK postcode.
At a glance
- Commercial property planning permissions approval/refusal rate in any full UK postcode – 74%.
- Average price per square foot of sold commercial property in any full UK postcode – 69%.
- Average commercial property asking price per square foot in any full UK postcode – 63%.
- Commercial property demand in any full UK postcode – 56%.
- Commercial property crime statistics in any full UK postcode – 51%.
- Average commercial property stamp duty land tax payable in any full UK postcode – 44%.
- Average internet speeds in any full UK postcode – 40%.
- Commercial property five-year capital growth projections for any full UK postcode – 32%.
With thanks to savoystewart.co.uk and Brian Shillibeer of This Week in FM
£21M a Day Drop in Commercial Property Investment
According to an analysis of HM Land Registry data, during the first eight months of 2019, an average of £249m was spent buying commercial property every day in England and Wales.
This is a drop of more than seven per cent compared to the £270m daily total in 2017 and a six per cent fall on the £265m in 2018, said Search Acumen which completed the analysis.
The fall has also hit volumes with 399 commercial real estate transactions on average per day in 2019 between January and August, down five per cent from 420 in 2018, and down seven per cent from 429 in 2017.
Brexit to blame?
Search Acumen blamed Brexit uncertainty for the drop, noting the property market was stuttering through a challenging year.
“The effect of Brexit uncertainty on day-to-day commercial real estate business is clear in the data,” it said.
In 2017, the busiest day of the year – 12 October – saw £4.9bn spent by commercial property buyers.
This was 37 per cent more than 2019’s biggest day so far which saw transactions worth £3.1bn completed on 29 July.
And 2018’s busiest day also registered four per cent higher with £3.24bn spent on 26 November.
Furthermore, only nine of the top 50 days from 2016-2019 for commercial property purchases by amount spent have occurred this year, while there have only been five days in 2019 where more than £1bn was spent, compared to 11 in 2018 and 10 in 2017.
Feeling the pain
Search Acumen commercial real estate business development manager Caroline Robinson said the sector was already feeling the pain of indecision every day.
“Our study has likely only confirmed what the industry has known for a while – 2019 has been a year of ‘wait and see’ as more transactions have been cancelled or put off until after the General Election and the Brexit decision has been made,” she said.
“Simply put, less commercial real estate business is being done this year as so much about the country’s economic outlook and future remains up in the air.”
However, Robinson noted it was heartening to see that deals of more than £50m were still regularly completing.
“This tells us that there is still plenty of confidence in the UK real estate sector and that for those who can be a part of such a large scale of development and sale, business is still good,” she continued.
“With indecision likely to remain into 2020, now is the opportunity for firms in the commercial real estate sector to assess how they can be best placed to take advantage of an eventual upswing in the amount and volume of transactions.”
How to hold commercial property in your Sipp
Harriet Meyer reports in IC that, commercial property is a popular alternative asset for investors seeking long-term returns in a self-invested personal pension (Sipp). The commercial property market offers compelling yields, often in the region of 6 per cent to 10 per cent, and plenty of tax advantages for investors. “It’s always been the cornerstone of the bespoke Sipp market,” says Gareth James, head of technical at broker AJ Bell. “Investors like the tangible nature of bricks and mortar as an asset, and benefit from rental payments boosting their retirement pot.”
However, the golden rule, as with any investment, is to do your research before investing and, given the complex nature of this form of investment, seek professional advice. As with all other investments, there is no guarantee of returns, and there are particular pitfalls to beware of when investing in commercial property.
The appeal of commercial property
You can hold any physical UK commercial property as an investment directly within a Sipp, including offices, shops, pubs and hotels. However, Sipps typically invest in industrial premises, such as warehouses or industrial units.
Claire Trott, chair of the Association of Member-Directed Pension Schemes (Amps), says: “People who are used to dealing with the commercial property sector in their professional lives tend to be the ones who buy an entire property using their Sipp as they understand the issues surrounding it, and the market.”
Alternatively, you could invest in your own business premises, effectively turning this into a pension fund. Any rental payments are paid into your pension instead of benefiting a third party. “We see a huge range of different businesses buying their premises in this way – including solicitors and accountants,” says Mr James. “It’s not restricted to a particular business type and accounts for about 50 per cent of our investors in commercial property within Sipps.”
By holding your business premises in your pension, you may be able to use your pension savings as a source of business funding. Whether you are buying a property for your business to occupy, or as an investment that will be rented to a third party, there are several tax advantages.
Justin Modray, director of Candid Financial Advice, says: “You are likely to have received tax relief on the contributions you’ve already paid into your Sipp and there is no tax on rental income or property value growth within the pension.”
Selling a property held in a Sipp will not trigger capital gains tax (CGT) because any growth in the property’s value belongs to the pension, rather than to yourself or your business. Pensions are not subject to CGT.
The value of your Sipp can also be passed on to your heirs outside of your estate for inheritance tax (IHT) purposes. This makes holding a commercial property within a Sipp a potentially attractive way to leave money to your family, who may be able to draw a tax-free income from this after your death.
The cost of buying a commercial property tends to mean it is the only asset investors hold in a Sipp, at least to begin with. However, the hope is that a surplus of rent will build up after any loans are repaid, enabling the investor to invest in other assets over time.
“But investing in any type of commercial property via a Sipp is a complex area,” warns Ms Trott. “Investors need to get advice, and use a good Sipp administrator and a knowledgeable commercial property/Sipp solicitor – people who understand the structure of this type of investment.”
Buying a property with your pension
There are several ways to buy an entire commercial property using your Sipp. You can purchase the property using money in the pension fund or, for example, if you already own the property through your business it could be sold to your Sipp to release cash back to the business. However, sale and purchase costs, including CGT and stamp duty, will be incurred.
If you need to borrow to fund the purchase of a commercial property, the Sipp can get a commercial mortgage, typically from a high-street bank. You can borrow up to 50 per cent of the value of the Sipp, with the loan repaid by the rental payments from the property. This restricts the value of a commercial property to £300,000 if you have, for example, £200,000 in your Sipp.
However, you can contribute up to 100 per cent of your earnings into a Sipp, up to a maximum of £40,000 in the 2019-20 tax year. You can also use carry forward to use your annual allowance from the previous three years, potentially contributing a maximum of £160,000 in a single year. This could boost your buying power over time.
You are also able to split the purchase of a single property between several Sipps. “For example, a family may club together to invest in a property, or a group of company directors could buy their business premises,” says Mr James. “But in this case, you have to be sure that you won’t fall out with the people you are investing with – managing a property with people you don’t get along with is not going to be pleasant.”
Security against any loan defaults comes from the value of your Sipp or the property, rather than your business or other personal assets.
Commercial property pitfalls
There are various complexities to take into consideration before using a Sipp to invest in commercial property. If the property falls in value or there are void periods, your Sipp may substantially fall in value. Property is also an illiquid asset – less easy to buy and sell than investments listed on public markets.
“Commercial property can add useful diversification to an investment portfolio, particularly for investors looking for income,” says Danny Cox, chartered financial planner at Hargreaves Lansdown. “But this sector is not without risk. Property is less liquid than equity investments, meaning it is not as easy to trade. Anyone who has ever tried to buy or sell a flat or house knows that these transactions take time and can be costly.”
You also pay fees and charges on top of the typical costs involved in buying a property, which could potentially see you out of pocket by a greater amount if a purchase falls through. “You’ll need to factor in expenses when buying a property, including stamp duty of up to 5 per cent, legal and conveyancing costs, and potential additional Sipp administration charges,” warns Mr Modray.
You need to guard against void periods when you might not have a tenant, as this could have a dramatic impact on your pension pot. “It’s vital to understand the local market when you buy a commercial property,” says Ms Trott. “If you put everything into the property and borrow on top of this, but it ends up empty, you won’t be able to pay the loan back and will be forced to sell the property to pay the bank back. Investors [in commercial property] should get all the professional advice they can, and try not to overgear.”
Getting professional advice will help you understand exactly what you are buying and where the returns will come from, so you avoid ending up with your Sipp dominated by a large, single asset that potentially stops paying tax-free income and could be extremely difficult to sell.
Mr James warns against holding commercial property in a Sipp to prop up a failing business. “You would be putting all your eggs in one basket,” he explains. “ If your business fails and the property is empty you’ll still have to pay business rates and administration charges to the Sipp provider, and there can be significant tax charges to pay if your business can’t pay a commercial rent.”
Other ways to get commercial property exposure
Conventional investment wisdom suggests that you should avoid relying on a single commercial property to fund your retirement. That’s unless you are an expert in this area, or have taken all the necessary advice, fully understand your investment and have plans to invest in other assets in the future. Typically, however, this involves more risk than most investors would be comfortable with.
But commercial property can be a portfolio diversifier because it behaves differently to other assets you might have exposure to within a Sipp, such as bonds and equities. And there are other ways to get exposure to it.
You could, for example, invest a small portion of your pension in a commercial property fund. Rather than being focused on a single commercial property, the money invested would be spread across dozens of different properties and potentially able to take advantage of a variety of trends in the market. But whatever type of commercial property fund you invest in should only be held as part of a widely diversified portfolio, as no one can say for certain what the future holds for the property market.
Shakhista Mukhamedova, divisional director of fixed income and alternatives at wealth manager Brewin Dolphin, says that there are several trends within commercial property with the potential for compelling returns. “We have been focusing on the sectors with the strongest rental growth and which are the least cyclical, so they do not depend on how the economy is performing,” she explains. “One example is student accommodation, which we invest in via a specialist property fund. This strategy specifically targets locations with favourable supply/demand dynamics, and has the potential for stable rental growth throughout the business cycle.”
There are plenty of commercial property funds to choose from, but there can be problems with holding illiquid assets such as commercial property, which cannot be easily bought and sold, in open-ended investment funds. It is far harder to sell an industrial unit, say, than a share or bond. So, for example, if many investors suddenly want to sell their holdings during a period of economic instability the commercial property fund’s managers may be forced to use their cash reserves to meet redemptions or stop withdrawals.
“When considering a physical property fund always check to see if it has at least a quarter of its assets in cash and shares,” suggests Mr Modray. “Otherwise, if investors head for the door the fund may have to temporarily close its doors while it sells properties [to reimburse the investors taking their money out of the fund], which can take many months.”
Alternatively, real estate investment trusts (Reits) and other closed-ended property investment trusts can be held in Sipps. Reits are essentially listed companies that make property investments, but instead of holding a share of the underlying holdings, the investors in them own the Reit’s shares. The Reit’s shares are traded on a public exchange, so should be relatively easy to buy and sell. Likewise, with property investment trusts, you also buy a share in an investment company that buys property rather than a property portfolio.
Mr Cox suggests TR Property Investment Trust (TRY). “TR Property has been managed by Marcus Phayre-Mudge since 2004 and is invested in a mix of property-related shares and physical property,” he says. “It has a dividend yield of 2.9 per cent and is up an impressive 96 per cent over the past five years [to 27 November].”
AJ Bell suggests getting exposure to commercial property via a low-cost exchange traded fund (ETF) such as iShares UK Property UCITS ETF (IUKP). But this does not invest in physical property – rather it invests in the shares of UK-listed property companies and Reits.