The Association of Real Estate Funds (AREF) has stepped forward to address some of the misconceptions surrounding property Open-Ended Investment Companies (OEICs). These open-ended structures for property funds have faced skepticism, particularly in the wake of the Brexit referendum and recent interest rate spikes.

Open-Ended Property Fund Challenges

Open-ended property funds allow investors to pool their money in a diversified portfolio of properties. However, their suitability has been questioned, particularly after the Brexit referendum in 2016. Several large property OEICs froze withdrawals, eroding investor confidence. More recently, in response to surging interest rates, similar issues have arisen, leading to the closure of significant funds like the M&G Property Portfolio.

Addressing Misconceptions

Paul Richards, the Managing Director of AREF, during an online presentation, acknowledged these challenges but argued that they were exceptions rather than the rule. He pointed out that during the 2008 financial crisis, property funds were not gated despite market upheavals. Similarly, the suspensions during the COVID-19 pandemic were due to a halt in property pricing rather than liquidity issues.

Richards emphasized the difference between daily traded funds and those with monthly or quarterly lock-ups, the latter having encountered fewer problems. He suggested that long-term savers need not prioritize daily dealing capabilities.

Comparative Returns and Advantages

Richards cited data showing that over a 10-year period, the average return from the Investment Association’s property sector was 25.2%. This outperforms corporate bonds (18%) and index-linked bonds (4.3%), though it trails behind UK all companies equities (45%). He highlighted the low correlation with other assets and unique income streams as additional benefits of property investments.

Regulatory and Platform Improvements

Richards pointed out that ineffective regulation has contributed to the challenges faced by daily dealing property funds. However, he sees this as an area ripe for improvement, particularly with better liquidity management tools.

Investment platforms also play a vital role. Richards advocated for enhancements in how these platforms offer property funds to retail clients. Facilitating access to funds with monthly or quarterly dealing could revitalize this asset class.

Institutional Investors and Long-Term Opportunities

The success of property funds with institutional investors, such as defined benefit pension funds that typically deal monthly or quarterly, demonstrates that the asset class can work effectively in an open-ended form. These entities have robust long-term liquidity management practices.

Richards sees a significant opportunity in adapting these practices for defined contribution schemes, viewing it as a potential trillion-pound opportunity.