Since the result of the EU referendum and impending Brexit, there has been a great deal of speculation and commentary on the effects it will have on UK property. The most immediate effect was on the value of shares in UK housebuilders which were hit badly along with Banks and other financial services stocks. Now, a week on we are starting to see the wider reaching impact as Standard Life and Aviva announce that trading is suspended in their UK Property Funds due to a draw on liquidity from their investors.
Let’s be clear, this is a current lack of liquidity in open-ended property funds, which are not the most suitable vehicles for holding illiquid property assets. The issue being investors, especially retail, can demand their money back at short notice.
Open-ended property funds only account for about 5% of the commercial property market and it should be emphasised that this is very different situation from 2008, this is not a bank driven illiquidity crunch.
On the positive side, the fall in the pound makes commercial property prices more attractive to international investors. It is worth noting that international investors account for over 25% of UK commercial property purchases.
The irony of voting to leave Europe is that it has given overseas property investors the opportunity to pile in and buy UK property cheaper!
And in a world of long term low interest (or negative) rates, global investors are still looking to property investment as an appealing income generating asset class. There are still property buyers out there.
Property investors are equity investors and as such they are exposed to market noise and volatility as seen above.
Sitting below equity is another property asset class, Commercial Real Estate (CRE) debt, traditionally a bank balance sheet instrument, it is now widely available by investing into Commercial Real Estate Debt funds or by direct investing on Peer-to-Peer Lending platforms.
CRE debt is a fixed income product backed by property, it is cushioned from day to day market noise and market volatility, but most importantly it is secured by way of a 1st legal charge. This means the debt investment is the first to be repaid when the property is sold or refinanced, and the property owner (equity) takes the first loss should the property fall in value. By foregoing participating in the potential upside of the property transaction (equity), investors in debt receive a fixed income return supported by real security and an equity buffer.
With UK interest rates having flatlined at 0.5% for the past 87 months and the Bank of England, post Brexit, indicating that base rates will be cut again in the summer, investing in commercial real estate debt offers savvy investors a real opportunity to earn property backed attractive rates of fixed income returns.
What used to be an institutional only asset class has now been opened up to individual investors through Peer-to-Peer platforms such as Proplend.