READING, England, 8 September 2003 — Europe’s unlisted property funds, which have grown dramatically in recent years into a 275 billion euros market, are moving into a new phase by broadening their investment base through secondary trading.
Institutions that have converted vast, illiquid property holdings into tax efficient investment funds are hoping to attract more capital and investors into the sector by replicating the characteristics of equity or bond funds.
“There is a lot of demand for a secondary market in PPVs (private property vehicles)... Work is going on in all the areas you’d need, such as Internet trading platforms and the provision of data,” Andrew Baum, managing director of Oxford Property Consultants (OPC) and professor of land management at Reading University, said in an interview.
“Until recently, people didn’t know how many vehicles there were, what they were called, or what the telephone number was... The situation will be better in a few years time. It’s in the interest of everybody to create liquidity,” he said.
On Sept. 23, OPC (www.opconsultants.com) launches Private Property Europe, an online database containing in depth profiles of 156 PPVs, with some information on 298 vehicles. The data covers the investors in the funds, their typical assets, property sector weightings, country targets and gearing levels.
It also encompasses the fund’s style, whether opportunity, core or core plus, and performance data will be provided by the London-based Investment Property Databank (IPD).
Baum estimated the total size of the PPV market in Europe at about 400 vehicles with a market capitalization ranging between 250-300 billion euros, or roughly five times the size of the listed property sector.
OPC has an agreement to supply a sub-set of data to the Amsterdam-based European Association for Investors in Non-listed Real Estate Vehicles (INREV), which was launched in May.
Baum said the dramatic growth in the British PPV market since the mid-1990s had slowed and 2003 had been a relatively quiet year for fund launches. This was possibly because the market had reached a plateau in the “natural” number of investment vehicles in the UK real estate sectors, particularly in the buoyant area of retail warehouses.
He said there is a potential gap in the market for funds in the depressed UK office market, but investors still seemed to be avoiding this sector.
The total market capitalization of the British PPV market is about 30 billion pounds, with tax efficient limited partnerships at around 16 billion pounds, from one billion in 1996, and the remainder in Property Unit Trusts (PUTs) and insurance managed funds.
Unit-linked property funds are awash with cash as pension and life fund investors have increasingly opted to put money into real estate when taking out these contracts following the equities market crash three years ago.
“Some of the PUT managers are starting to think of their vehicles as not dissimilar to closed-end structures. They’re not experiencing this wave of capital into their vehicles and the core redemptions out. People are now happily trading in the secondary market,” Baum said.
He added it was already clear there is pressure to create bigger limited partnerships, possible through mergers, in order to create more interest in trading the secondary units in these structures.
“I think there’ll be fewer vehicles in five years time than there are now.”
Baum pointed to the examples of the Hercules Unit Trust and the Lend Lease Retail Partnership as the way the market may go.
Hercules, advised by Pillar Property, is the largest retail investment trust in the UK. Lend Lease is one of the best known British Property limited partnerships and holds both the Bluewater Shopping Center in Kent, southeast England and the Touchwood Center in Solihull, central England, which have a combined value of over 1.5 billion pounds.
Baum said that if the UK Financial Services Authority (FSA) proposals to allow the creation of retail property funds holding all their assets in real estate are implemented next year, the institutions will probably carve out investment structures from their existing property holdings to meet this demand.
Most British PPVs are now unauthorized, meaning they can’t be marketed to retail investors, but the possible creation of regulated property funds allowing access to high retail estate yields averaging about 7.0 percent, is expected to attract large capital flows.
“If the actuary at the Prudential wanted to reduce his weighting to property, it would be natural to spin off the lower end of the Pru Life Fund into a retail product,” Baum said.
The Prudential is Britain’s largest property investor and its Life Fund has around nine billion pounds in real estate assets.
