If you are covering Legal & General’s proposed changes to its daily-dealt UK Property fund, please see the following comment from Oli Creasey, property research analyst at Quilter Cheviot:
“Legal & General has this morning announced proposed changes to its daily-dealt UK Property fund. The fund is currently invested primarily in direct UK property, with a cash balance if c.20% to provide liquidity for investors looking to redeem at any time.
The proposed change is a significant one, with the fund intending to reduce the direct property weighting to c.45%, with the remainder being invested indirectly in property via REIT shares, with a smaller cash balance to cover short-term liquidity needs.
The change is significant for a number of reasons. Most notably, this appears to be a direct response to the ongoing FCA consultation regarding daily-dealt property funds. The reduction in direct exposure will place the fund outside of the consultation, which is focused on funds with >50% direct exposure, and mean that if the FCA’s conclusion is to require daily-dealt property funds to put in place three to six month redemption delays, the L&G fund will still be able to offer daily liquidity to shareholders.
The move to a hybrid approach by L&G will likely put a spotlight on the hybrid approach to property investment, with the fund likely to be the largest in what is still a relatively small sector – funds such as Columbia Threadneedle’s Property Growth & Income fund, and TIME Investment’s Property Long Income & Growth fund have been operating on a similar basis for some time, but have not built the sort of scale that L&G already has – the fund is currently over £1.2bn in size and will dwarf those longer-standing peers.
We are in favour of this hybrid approach for property investment. Maintaining a significant weighting to REITs and other property companies mean that the fund will be able to provide genuine liquidity in the vast majority of scenarios, given those shares are frequently traded on stock exchanges. However, the remaining direct property weighting provides investors with a less volatile investment – REIT shares can, and do, change value considerably day-to-day, and direct property exposure should dampen that effect, and also provide a higher income than REIT dividends. There is no perfect way to provide liquidity without volatility in a sector where the underlying assets are fundamentally illiquid, but we feel the hybrid approach generally provides the best of both worlds.
We are encouraged that L&G is proactively seeking to move beyond the FCA’s consultation, which has been a significant headwind to property investment in the UK, and is shining a spotlight on the hybrid property fund sector, which strikes us as a sensible approach to property investment.”
