It is no revelation to state that the pandemic has materially affected the economic landscape. Whilst the impact on stock markets was heavily felt in the early stages of 2020, the recovery of economies and markets since then has been relatively swift, supported by governments and central banks. However, some parts of the economic landscape have materially changed and it is questionable whether we will ever return to the way things were before.
The pandemic significantly accelerated longer-term trends that were already starting to happen across the world: flexible and home working arrangements being a prime example. Overnight, this went from being something offered by a few companies, to something for all, and as we sit here today with economies looking to fully reopen it is clear that working patterns for many will have fundamentally changed forever. Online retail is another clear example of a trend that was already well established but accelerated to far higher levels in a blink of an eye.
Demand for commercial properties that businesses operate from has therefore in some instances been affected by an overnight shift in operational behaviour. When the pandemic first severely hit us here in the UK back in March last year, the Financial Conduct Authority’s rules meant that investment funds that own such commercial properties had to suspend their daily dealing for investors due to “material uncertainty” in the future environment and therefore the value of the properties they own. These rules are in place to protect all the investors in the fund, and stop longer-term investors from being affected by shorter-term speculators.
Within our portfolios, we have held a limited exposure to commercial property fund assets for some time, as it is a good source of investment income and total return, as well as being a diversifier from other types of investment. We have always been aware that funds that own “physical properties” have the potential to suspend, so have always spread our exposure across a number of funds to diversify risk.
One such fund that we held going into the pandemic was the Legal & General UK Property fund which was suspended back in March 2020 but then due to the nature of assets held was able to reopen in October last year. Despite seeing nearly 20% of its nearly £3bn value withdrawn by investors when it reopened, the fund has been able to cope well with this and actually has delivered a positive investment return for clients since the start of 2020 (up +6.7% from 1st January 2020 to 31st July 2021, bid-bid, source FE Analytics).
We also held the Premier Miton Pan European Property Share fund as part of our diversified property exposure at the start of 2020. This fund is different in so far as it holds shares of listed property companies who themselves own the underlying properties, that deliver income and capital movements to the fund. Because it invests in property companies listed on stock markets, this fund behaves more like an equity fund in the short term (dropping by around -40% when the pandemic first hit, in line with many stock markets). However, over the long-term, its characteristics are more like those of the underlying properties and again since 1st January 2020, it has delivered a decent positive return (+10.9% from 1st January 2020 to 31st July 2021, bid-bid, source FE Analytics).
Another fund that we held at the start of 2020 as a relatively small weighting in portfolios has not fared quite so well. The AEGON Property Income fund differentiated itself from these others by focussing on slightly smaller value commercial properties – typically those worth £3m-10m. We held the fund as it has a good, experienced management team and the investment case was attractive, focussing on more regional properties, with reasonable exposure to office space which as a sector back then forecasted to do well through 2020 and over coming years. It also complemented our other property strategies relatively well.
As we know the landscape changed overnight and the team managing the AEGON fund found quickly that what they thought was a relatively well-positioned portfolio for the next few years, quickly became less appealing as the pandemic took hold and behaviours changed. As such, the fund has remained suspended since March last year, as the management team have sought to manage the portfolio and raise liquidity to meet potential outflows in an orderly fashion. They feared that by reopening the fund too soon there would be a big demand for investors to withdraw funds and that would mean having to sell properties too cheaply below their material value. Therefore again to protect all investors the right decision was to remain suspended.
Following on from this, the management team have now decided that rather than work towards a reopening of the fund, an orderly closure is the best course of action. This will continue to allow the team to look to sell properties in their own time, and look to achieve the best prices, and therefore maximum return, for investors.
As cash is raised within the fund, it will be paid back to investors portfolios, to their pensions, ISAs or other investment accounts. The first such distribution has just taken place. We are in regular contact with AEGON around this process and as money is returned into clients’ accounts we will be deploying it into alternative investments as part of the management of their overall portfolios. Thankfully our discretionary permissions allow us to do this easily and efficiently for our clients.
We still believe that an element of exposure to property assets is sensible within clients’ portfolios. After all, some sectors have been massive beneficiaries of changing trends – just look at the need and demand for warehousing and logistics space to support the growth in online retail. Property assets still provide decent income (at a time when income is hard to find), and decent diversification from other types of investments, and as ever we will look to gain our exposure through a variety of strategies to help manage the risk exposure for our clients.