Copyright: David Lawson/Financial Times 1997Home page
The search for new forms of property finance has intensified in the last year as investors look for more sophisticated instruments to match those in other sectors. Property has always suffered problems of illiquidity and the need for intensive management. This is a particular concern for international funds, which seek the flexibility to slip in and out of markets as nations move through differing cycles. Investors also have difficulty where they have no local presence to manage assets.
The success of tax-efficient German and Dutch funds and the boom in US real estate investment trusts (REITs) have proved a frustration in the UK, where successive governments have rebuffed calls for similar vehicles. Campaigners were disappointed not to see new measures in the recent Budget - the last by the current government.
Gross funds have long aspired to a method of avoiding tax penalties. Demand for indirect vehicles almost doubled last year to 43 per cent of institutional investors surveyed by JLW Finance. This is a problem that will become even more intense as the private pension industry develops in mainland Europe.
Perhaps they should take heart from Belgium, where it took five long years to pass laws enabling the creation of closed-end investment companies called SCIAFI. According to property consultant Healey & Baker, these are now beginning to take off, with cross-border investors swapping direct property for tradeable units.
Some progress has been made in the UK with a change in Stock Exchange rules to allow a new kind of open-ended listed trust. Dusco, the investment management group which has forcibly campaigned for these changes, hopes to persuade funds to swap more than 100m worth of shopping centres for tradeable securities. Chairman Dik Dusseldorp[CORRECT], who pioneered similar listed vehicles in Australia expects to launch within weeks.
Schroder, which already runs a tax-efficient European property trust from the Netherlands, is also understood to be working on a new vehicle with NatWest Markets to produce results comparable to a REIT.
Similar energy is going into creation of a derivatives market, where investors can distance themselves even further from the problems of direct property and bet instead on the whole sector. BZW, which pioneered this approach with Property Index certificates two years ago, is boasting a turnover of more than 200m within months of launching its Property Income Forwards (Pifs), an over-the-counter contract which provides a return based on the benchmark Investment Property Databank UK Index.
Leading merchant banks are also under pressure to explore this area. Goldman Sachs, Warburg and Citibank are experimenting with vehicles for private clients which are rated against a basket of leading property company shares as proxy for the market. BZW Property Investment Management chief executive Iain Reid points out that property will never be able to provide the full range of attracions for investors until it can offer a futures market comparable with equities.
That will demand a fully tradeable, non-proprietory contract, which is exactly what a group of leading UK funds are working on. But this is proving much harder work than expected - again because of the layers of bureacracy that must be satisfied. It could be 1997 before they take off. This could lead top a whole range of instruments aimed at cross-border investment. Investors are keen on vehicles which focus on specific countries - or even specific sectors - so they can target growth more accurately. Derivatives could play this role as market indicies are developed for countries like the Netherlands and Germany.