Where next for investors in open-ended property funds?

Property investment companies are the better option.


With Janus Henderson UK Property PAIF recently confirming that it has agreed a sale of its property portfolio, investors in the fund wanting to retain exposure to this asset class may be wondering where to invest the proceeds.

Open-ended direct property funds have been in decline since their assets under management peaked at £22.0 billion in May 2016, just before the UK’s vote to leave the EU. At the end of March 2022 they had assets of just £9.1 billion, or approximately £8.1 billion excluding the soon-to-be-terminated Janus Henderson fund1.

Meanwhile, assets in closed-ended property investment companies, most of which are structured as REITs2, have almost tripled from £8.3 billion of assets in May 2016 to £22.3 billion by the end of March this year3.

While open-ended property funds have been dogged by the problem of trading suspensions, property investment companies have thrived. Investment companies in the AIC Property – UK Commercial sector returned an average of 226% in the ten years to March 2022, compared to 161% for open-ended funds in the IA UK Direct Property sector.

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “The open-ended structure has repeatedly struggled with direct property investments. Investors have experienced numerous suspensions – in the global financial crisis, following the EU referendum, and most recently during the coronavirus pandemic.

“We are still waiting for the FCA to announce its conclusions on the possible introduction of notice periods for open-ended property funds to try and address those liquidity mismatches, but in the meantime, it appears that investors are voting with their feet. The sale of the assets held by the Janus Henderson UK Property PAIF marks another move away from open-ended funds investing in this asset class.

“Property is a distinct and important asset class that has delivered strong returns for investors and it can form an important part of a diversified investment portfolio. The decline of open-ended property funds should not be a reason for investors to avoid this asset class. Investors who still want exposure to property should consider property investment companies which have a robust, proven structure and track record. During times of market stress you can expect the share price to fall, but the fund manager is under no pressure to sell the underlying assets to meet redemptions, and the shares are tradeable whenever the stock market is open.

“The structure of investment companies removes the pressure to manage capital flows and is the primary driver of property investment companies’ ability to deliver strong returns over the long term. They can be fully invested without having to hold cash to meet redemptions, and will never be forced to sell properties at times of market stress.

“For the same reason, property investment companies can also deliver higher levels of income: for example, the average yield of our UK commercial property sector is currently 4.5%. The REIT structure of these companies enables income to be passed through to investors in a tax-efficient way, especially when shares are held in an ISA or a pension.”


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Notes to editors:

  1. Assets in open-ended direct property funds are from the Investment Association’s UK Direct Property sector.
  2. A REIT is a real estate investment trust. In this press release, REITs refers to investment companies which confirm to HMRC’s rules for maintaining UK REIT tax status. The statistics quoted do not include trading company REITs, such as British Land and Land Securities, whose activities include developing properties for sale. While these companies enjoy the same tax advantages as investment companies. 
  3. Assets in property investment companies are direct property only – excluding Property Securities.
  4. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 360 members and the industry has total assets of approximately £268 billion.
  5. Performance data is share price total return for the average VCT to end March 2022. Source: AIC/Morningstar.
  6. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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