Morgan Garfield writes for Estates Gazette: A brighter side of Brexit uncertainty
Posted by Estates Gazette on 16th Jul 2016
Sadly
we have arrived at the end of the Welsh football dream.
Ronaldo
has cruelly forced me to return from France and join everyone else in pondering
the impact of Brexit on real estate.
Certainly,
Brexit is bad for our sector, but I don't feel we are in 2008 again.
Blocking
redemptions from £15bn or more of open-ended funds casts the whole sector
in a negative light. The inference is that the underlying properties have
crashed in value and cannot be sold. This is not the case.
The
reality is that these open-ended funds are not fit for purpose. Their
predicament is structural rather than purely cause by the market or Brexit.
They
purport to offer retail investors liquidity in an illiquid asset class. They
don’t.
Cash
and liquidity management is critical in any business and your assets and
liabilities need to be matched.
Northern
Rock was a case in point – it had a solid long-dated mortgage book, but went
bankrupt as it relied on short-term funding that it could not renew in a credit
crisis.
The
open-ended funds that have been frozen are the same. They claim to be liquid,
but in reality this is limited to a finite cash buffer that cannot deal with
significant investor redemptions. Would you buy a car where the brakes only
work on flat roads and not on steep hills?
Their structure failed in the credit crisis, with redemption
restrictions that lasted years in some cases, and it appears that nothing has
been done by the fund managers or regulators to address this issue.
Surely REITs are a better structure for retail investors? Despite
the recent collapse in share prices, they offer liquidity – investors can sell
shares without the need to liquidate the underlying properties – high levels of
transparency and good corporate governance.
So where are the underlying property markets? The honest
answer is that nobody truly knows.
The value of an asset is conditioned by its rental income
but also the confidence of investors. Assessing the evolution of investor
sentiment is always hard, especially so close to a major event that has many
potential repercussions. I suspect that any renewal in confidence will take
time and additional political clarity is likely to be an essential precursor.
In the interim there will probably be very limited transactional activity.
I don’t perceive there are many truly forced sellers,
despite redemption pressures on certain funds, and while there is a lot of cash
available to invest, I anticipate they will be cautious in their approach
unless there are obvious bargains. The bid-offer spreads are likely to be too
wide to see many deals concluded.
However, there could be another scenario.
Real estate offers an attractive yield relative to cash,
bonds and borrowing costs. What is the appropriate yield for real estate in
what now appears to be a long-term “zero” interest rate environment?
The investment industry relies on income. Real estate is one
of the asset classes that can deliver this. Could we see a re-rating of income
assets lead to a rapidly recovering real estate sector, albeit with a focus on
income rather than capital growth? Am I overly optimistic? Possibly.
Then again, you probably didn’t believe Wales would make the
semi-finals of Euro 2016.