Copyright: David Lawson - Property Week Feb 2001
After removing the tongue from his cheek, Mason seems to think so. Investors want to be involved in property but avoid the inherent problems of liquidity, taxation and getting the right product. ‘There will be a lot more of these vehicles,’ he says. William Hill, managing director of Schroder Property Investment Managers goes much further. ‘We are at the door of a revolution,’ he says. ‘Within three years the sector will be bigger than the market value of all the major property companies.’
Until recently that would have raised little more than a wry smile from most fund managers but three factors have started to erode the industry’s conservatism. First, the battle for US-style real estate investment trusts appears lost. New Labour has shown no inclination to grant the kind of tax exemption pension funds demand. Second, non-traditional vehicles like limited partnerships and onshore trusts have moved from the fringes towards the mainstream of investment.
But the most important impact for property companies has been the City’s reaction to Pillar floating more than £1bn of assets into offshore trusts. ‘ Now everyone wants to see if they can do a Pillar,’ says one leading developer. While rivals struggle against investor apathy and antagonism, Pillar has been picked out as a template for the way all property companies will look one day.
Imagine a structure which is little more than a manager, stripped of its equity base to a level where it needs only working capital to develop its portfolio. Top-rated City analysts Alan Carter and Mike Prew saw that possibility when measuring the company against the sector for CSFB. Pillar uses traditional entrepreneurial skills to enhance assets but instead of boasting about soaring net asset value or selling to an institution, it transfers them into a special fund and continues drawing fees for management and advice.
Others must, therefore, be racing to match this achievement? Errr….not really. Conservatism is not dead. One of the most likely candidates should be MEPC, with an approach to enhancing shareholder value so bold that the company has been dismantled and withdrawn from the public sector. But chief executive Jamie Dundas says offshore trusts are ‘not in current plans’. They might be useful when packaging assets into a structure where overseas investors did not want to take a UK tax hit, but there were negatives like extra legal costs.
British Land has developed a formidable reputation as a financial engineer after complex debt securitisations such as Broadgate. But it, too, remains aloof. Director Nick Ritblat also uses the term ‘useful’ but adds they are not in the same league as US-style closed-end real estate investment trusts. ‘I still think that REITs will happen here,’ he adds.
And so it goes on. But a handful of rebels have put their heads above the parapet. Roger Carey led the campaign for new kinds of tax-transparent investment vehicles when president of the British Property Forum but, unlike Ritblat, believes the REIT battle is lost. Instead, he is aiming to inject £100m of industrial property held by his firm, Saville Gordon, into an offshore fund which will be managed by Jones Lang LaSalle. ‘It is as close as investors can get to a proxy for direct ownership,’ he says.
Secondary trading will provide the much-needed liquidity without incurring due diligence costs and stamp duty. Meanwhile, the company gains by reducing debt while retaining a stake in the property and generating management fee income.
If the sales pitch works – and Carey says there has been ‘a lot of interest’ – this could be a significant advance, as it taps the other end of the market to the prime City offices and retail parks injected by Pillar. This is messy, multi-let industrial property, which has temptingly-high yields but is normally shunned by institutions because of the high management requirement. Carey points out that is the very strength of arms-length ownership through trusts, as the management is part of the deal.
One danger is that others will see offshore funds as a way of dumping property to remove debt from the balance sheet. Don’t even contemplate it, says Mason. ‘The essence of these trusts is transparency,’ he says. Secondary trading can work only where information such as valuation and management fees are easily available – in fact, volunteered through regular reports that would scare the pants off most public companies. Is this the reason why so few have yet ‘done a Pillar’? Carey points out that attitudes have changed. ‘A couple of years ago we might have considered using a limited partnership rather than an off-shore trust,’ he says. ‘The important thing is that people are trying to find a more suitable vehicle for property investors.’
What are offshore trusts?
The one point every manager emphasises within seconds of discussing offshore trusts is that they are not tax dodges. ‘We have spent a long time escaping the image of Cayman Island slush funds shrouded in secrecy,’ says Simon Radford, chief executive of Atlantic Fund management.
They certainly avoid the double-taxation and stamp duty problems institutions face when investing in companies but so do onshore property unit trusts. The point is that tax-free funds cannot ‘co-mingle’ with private and overseas investors or insurance companies, which cuts out a massive slice of the market. Even limited partnerships, which are also tax transparent, benefit by shifting to centres like the Channel Islands as this raises the maximum number of partners from 20 to 50, improving the potential liquidity.
William Hill, managing director of Schroder Property Investment Managers, sees so little difference between on and offshore that he tends to lump then together as part of a growing interest in unitised vehicles by investors seeking liquidity and access to special markets. Onshore funds have proven themselves through extensive secondary trading and market performance. This is now changing attitudes to offshore vehicles, he says.
Limited partnerships have been useful to breach tradition and continue to proliferate. Ashtenne, for instance, has just put £250m of property into a partnership with Morley Fund Management. There are offshore versions, which enable the 20-partner barrier to be breached, but they are still aimed at more limited ‘clubs’ involving fewer partners looking for investment over a definite timespan. David Wise, property investment director at Morley, says he might have gone for an offshore fund today, particularly if looking for a wider band of investors.
Henderson has launched a Jersey-based £600m fund aimed at UK retail warehousing, seeded by Pearl Assurance and NPI with six properties worth £180m. This will be aimed squarely at institutions and given a limited seven-year life, but Patrick Bushnell, director of property fund management, sees it as one instrument in an orchestra of investments.
‘A lot of property companies are reinventing themselves and more will inevitably become involved in some way,’ he says. Joint ventures could lean towards limited partnerships. ‘People forget that we have the largest one in the UK with Land Securities and Hammerson in Birmingham’s Bull Ring.’
But unitised funds will become more common, particularly as performance shows through and secondary trading increases. Schroder’s Chiswick Park, for instance, was thje best performing fund in the IPD last year. Deutsche Property Asset Management’s Jersey funds traded £175m of units last year, most at mid-price. Chief executive Simon Cooke rarely blows his trumpet, despite setting up such funds long before most others had spotted this niche. But that belies an unrestrained enthusiasm for the potential role in attracting private and overseas investors into UK assets.
Despite the cool reaction of major listed companies, Hill sees the Pillar deals as a hint of how the sector could be revolutionised, with units ultimately trading like current company shares from Reuter screen quotes – but at a fraction of the dealing costs. ‘But first it needs product,’ he says, suggesting he is doing his part by aiming for a clutch of £1bn funds. Over to you Mr Developer.
EXAMPLES OF OFFSHORE FUNDS
Schroder property Managers [Jersey]
Retail Park Unit Trust – acquired 400,000 sq ft Fosse Park, Leicester, releasing capital for Pillar Property and SITQ International. Worth £297m.
City of London Unit Trust – vehicle for Pillar’s acquisition of Wates City. Attractive because more than £500m of large City buildings will be unitised. Could be a template for other takeovers.
Hercules Unit Trust – Pillar linked with Equitable Life in retail warehousing worth £285m
Chiswick Park Unit Trust – acquired 33-acre site for £50m to develop 1.46m sq ft of offices. Seven investors including other major groups like Aberdeen Asset Management. Already worth £250m. End value expected as £450m
Residential Property Unit Trust – sector specialist worth £26m
Henderson UK Retail Warehouse Fund – initial £180m of Pearl and NPI assets aiming for £600m-£1bn of top-end property. Unauthorised, Jersey-based collective investment aimed at institutions withj seven-year life [could be extended]
Saville Gordon – offshore fund to package up to £100m worth of high-yielding, multi-let industrial property. Will be administered by Jones Lang LaSalle.
VARIATIONS ON A THEME
Deutsche Property Asset Managers - Jersey-based, Dublin managed funds grown from £45m to £600m in 11 years, showing annual returns of 13%.
Lothbury – Atlantic Fund Management [merger of REStQ and Gartmore] balanced fund based in Dublin. Grown £50m in first year to £300m, attracting 14 new investors
Baring Houston & Saunders – Guernsey-based £120m residential limited partnership to help Dutch funds invest [BH&S is part of ING]. Ten-year life chosen to provide performance benchmark rather than face possibility of ‘fudged figures’ from open-ended structure.
Grosvenor - £40m Guernsey residential fund with Kleinwort Benson. Not seeded with Grosvenor’s own property but it aims to put in 10% of the initial capital.