Does L&G move signal a bounceback for listed real estate?

COMMENT While the headlines from the first two months of the year might paint a gloomy outlook for the European real estate sector, listed real estate is hopefully set for a bounceback this year. This position is bolstered by the news that L&G is planning to overhaul its UK Property Fund. The majority of the £1.2bn fund – one of the few and largest left in the market – is currently invested directly in UK property, but L&G intends to move almost half the portfolio into global real estate investment trusts. Hybrid approach “Relative to other asset classes, we feel that the UK property sector remains an attractive diversifier in any balanced portfolio and is well positioned for investors with long-term horizons,” said LGIM’s UK head of wholesale, James Crossley, on announcement. First and foremost, L&G’s proposal is a justified and unequivocal show of confidence in the future of listed real estate on a global level, alongside the continued importance of the UK. But second and crucially, this “hybrid” approach – whereby 45% of the fund will be held in direct property, 45% will be reallocated to global REITs and 10% will be held in cash – enables the fund to continue offering daily liquidity to its investors. The macroeconomic focus of 2024 globally is on stabilising and, as the re-stabilisation happens, having good liquidity will continue to be fundamental for investors. L&G’s proposal is a recognition that listed real estate is safer than direct real estate investments because it’s much more liquid – a fact which is all too often overlooked. Additionally, listed real estate players are longer term owners meaning they are more invested in the communities and places they serve, as opposed to a maximum 10-year direct fund. Through its move, L&G has signalled to investors the resilience the listed sector provides. REITs have continued to perform well and should represent a much larger part of any long-term asset allocation. This is backed by the fact that listed real estate markets rallied in the final quarter of 2023, returning to 17.4% year on year, and by its long-term outperformance versus other asset classes. Looking even further into the future, according to Oxford Economics, it is expected that in the next five years, listed real estate will outperform equities and direct real estate owing to the strong boost to growth at the end of last year. Liquidity ensured However, also notable is the timing of L&G’s announcement, which makes it appear to be a direct response to the ongoing FCA daily-dealt property funds consultation. A reduction in the firm’s direct property exposure will place the fund outside of the consultation, which is focused on those with more than 50% direct exposure. This will mean that if the FCA concludes by deciding to require such funds to establish three-to-six-month redemption delays, the L&G fund will still be able to continue offering daily liquidity to shareholders. Many will agree that it is encouraging to see a firm willing to flex, look for solutions and innovate when faced by a regulatory hurdle, rather than taking a defeatist approach. And, while shareholders are yet to vote on the proposals (they will in April), it is hard to ignore the favourability of REITs in the wake of M&G’s decision just last month to extend gating on their flagship retail property fund. Could the future of direct property funds depend on a similar hybrid model, in which REITs are relied on? And will L&G open the floodgates for other investment managers to restructure their portfolios accordingly? Overall, it’s promising to see institutional players like L&G recognising the value potential of listed real estate, which is set for a healthy recovery in 2024. But perhaps more importantly, L&G’s move points towards a hopeful bigger picture for European real estate and economy at large. What remains to be seen is whether L&G shareholders vote in favour of the proposals. If they do, we might just see other PAIFs follow suit, and L&G reap the benefits of remaining resilient. Dominique Moerenhout is chief executive of the European Real Estate Association Image from European Real Estate Association