Owning real assets such as property has often been thought of as a good hedge against inflation, but the issue with property is its illiquidity.
Open-ended funds looked to address this, but ran into their own problems, in particular, when the fund is trading below its net asset value.
Assets under management in open-ended property funds have fallen steeply from their 2016 peak of £22bn to £9.1bn in March 2022. Many funds were gated when redemption demands rose, which suppressed investor appetite and increased scrutiny from the FCA. Another blow to open-ended property funds was this month’s announcement that Janus Henderson is to sell its fund.
Open-ended funds often sit on large cash reserves of up to 20% to deal with potential redemptions, leading to cash drag, which affects their ability to generate attractive returns. Further to this, funds’ best assets are the most liquid, so when they face large redemption requests they can be forced to sell their best assets that can be disposed of most easily and quickly. This often leads to a downward self-perpetuating cycle of redemptions, discounted asset sales, reduced returns, higher redemption demand, and fund gating.
Some investors are turning to housebuilders for property exposure, while also being able to benefit from the liquid nature of owning shares in a listed company. Yet this sector is still dogged by uncertainty from cladding issues. Many housebuilders landbank, exposing investors to the value of increasing (or decreasing) value of present and future potential development land. Where high dividends are offered, this high yield reflects a decrease in share value.
Liquidity is the crux of the issue for investors who face the challenge of soaring inflation and geopolitical uncertainty. Investing directly in property doesn’t offer the liquidity of an open-ended fund, but there are potential advantages such as greater transparency of the underlying investments.
This is something we have aimed to solve in our investor offering at Brickowner. Polling our investors, we found they wanted straightforward access to professionally managed single investments and portfolios, but needed liquidity in the closed-end structure we provided.
In 2021, we launched a secondary market to allow investors to trade all or part of investments before the end of the fixed term. This has helped property compete with more liquid asset classes.
The benefit of using an online platform is that investors can do everything online. Gone are the days of reading hundreds of pages to learn about an investment opportunity, only then to need a lawyer to get ID documents certified before being able to invest. This can now be done online. Technology can shorten these processes from weeks to minutes, saving time and expense and has significantly changed the way property investing works.
Harnessing technology to overcome the issues of closed-ended funds and the illiquidity of property is working for Brickowner. Since 2017, we have helped fund over £100m of GDV in the UK and our average investment is £20,000. The secondary market allows investors to exit an investment before the full term by selling via the platform to other certified investors, so we find a good balance between the opportunities of illiquid property investments and the use of tech to create liquidity for our investors in those assets.
Frederick Bristol is chief executive of Brickowner