£12bn set for real estate securitisation

Copyright: David Lawson 1996

Home page

Surveying firms face losing of a major slice of their income as investors prepare for a sea change in the way they deal with property. Up to £12bn could be switched from direct investment into new   securitised vehicles over the next five years, says Rupert Clarke, managing director of Jones Lang Wootton Finance. But institutions expect  financial specialists rather than surveyors to manage these funds.

  'This lack of confidence does not match facts,' says Clarke. 'Surveyors have performed well as fund managers. At JLW, for instance, we have achieved almost 3% above the IPD index over 10 years and more than that in five years.'  But institutions still put surveyors bottom of the list of potential managers of indirect funds in a JLW survey. They trail specialist managers, merchant banks, property companies and insurance funds.

 'Surveyors will have to go out and tell the world of their achievements, or they will be marginalised. They have to reinvent themselves in the eyes of the big institutions,' he told  the Investment Property Forum annual conference in London.   The problem is urgent. Clarke says there is still work to be done before suitable tax-efficient vehicles are introduced. But after countless false dawns, derivatives such as Property Income Certificates are  establishing a niche and  new forms of investment trusts could be launched soon.

  Support for derivatives  has doubled to 43% in a year, says the JLW survey, which drew on funds accounting for more than £20bn of direct property investment.  'And that is before a proper market has established,' adds Clarke. 'Once the system gets into full swing, interest will double again.'

  More than a fifth of funds threaten to swap  direct property for stakes in managed funds in a bid to raise liquidity and spread risk. That would put £4bn worth of assets in play. But the figure swells  as high as £12bn once a market has been established, drawing in smaller funds which currently show no interest. Others pushing up the total  will include  overseas buyers and funds swapping  part of their holdings for indirect shares. This would reduce not knock the bottom out of the market as some fear, however. 'The new funds would take over these assets,' says Clarke.

  They will also grab the lion's share of management fees - a point which seems to have been lost on chartered surveyors, who cruise along expecting to play a continuing role. Clarke warns that unless they recognize the failure to generate confidence among investors - reflected in the projected preferences for future managers - the  financial professionals would encroach further into traditional surveying territory and fee income  will collapse.


The final piece is about to  fall into place  for a ground-breaking listed unit trust aimed at giving investors a tax-free, liquid stake in property.  Dusco Group  chairman Dik Dusseldorp told the Investment Property Forum annual conference that SIB and IMRO, the two regulatory bodies, were 'in the can' and predicted that the Stock Exchange will give its approval this month. Staff are already testing software for running the new trust, which he says will be 'the most tax-transparent equity on the stock market.'

 This will play a vital role for funds unable or unwilling to buy the more esoteric derivatives now coming onto the market, said Hermes chief executive Alastair Ross Goobey. But Dusseldorp made it plain that he expects members of the public as the main customers.   He had no institutional backers in the fight to set up the same kind of trust in Australia 25 years ago. Now it is worth A$3bn and has more than 1,000 members. 'Don't underestimate the perception of the  man in the street,' he said, pointing to the need for a supplement to State pensions and the perennial demand for property.

  He shrugged off criticism that this kind of open-ended fund, which is committed to buying back units, faced problems when markets fall. The Stock Exchange had agreed they could close the doors in time of crisis, which would prevent fire-sales dragging values into a black hole as trusts struggled to pay back investors.

  Big investors remain more enthusiastic about closed-end vehicles such as US-style REITs, where shares can be sold on the open market to give the liquidity they demand.  Campaigners face a nail-biting wait to see whether the Chancellor will give approval to tax changes in what could be his last Budget.

 Even if that comes, securitisation could be a 'damp squib', he warned. Institutions will have to dive in with enthusiasm to ensure an active trade in shares, otherwise there would be no liquidity.  Some groups must set up as market-makers, added Rupert Clarke, of JLW Finance.'They are the key to everything. Investors will not buy unless they know they can sell again,' said Clarke.

  The other side of that coin is that values could become more volatile, undermining the last defence of property as a low-risk investment. 'This is a phoney argument,' said Ross Goobey, pointing out that what valuers say often does not match what is happening in the real world.

 The alternative to new vehicles easily outbalanced possible drawbacks. Factors such as obsolescence, shorter leases and low inflation could see a wholesale departure from investment in property. This would have a widescale deflationary impact as companies were forced to tie up resources in buildings which would give lower returns than their core business. 'The only way property will maintain its place as an asset appropriate for long-term investment is to eliminate the Venus Fly Trap rule: easy to get in but hard to get out,' he said. Derivatives and securitised vehicles would bring London up to the standards of other financial centres. But it would be up to investors to make it work - if they ever get the chance.


Not all leading professionals have been drawn into the clamour for securitised property. In fact, Drivers Jonas managing partner Chris Armon-Jones is exceedingly underwhelmed about what he calls an 'unnecessary' drive for change. 'It may be the Holy Grail for funds who dislike illiquidity and high transaction costs. It may produce a whole raft of services for professional firms. Bit it may also sound the death knell of the property investment market as we know it - and real estate as an asset class,' he says.

  Armon-Jones puts his faith in a less exciting campaign by the IPF - its new code encouraging  property to be kept ready for sale. The reasons for illiquidity are often misunderstood,' he says. Any competent combination of surveyor and solicitor can execute a property transaction in days, if not hours, if the vendor is properly prepared.'