Fund run: exiters and remainers

After various consultations, recommendations and analyses are emerging from various bodies following the ‘redemption panic’ for open-ended property funds post the Brexit referendum.  This is discussed very well in a piece in the FT today.  Similar to banks who promise to repay all their customers deposits whilst only having a small fraction of them available, open-ended property funds attempt to provide liquidity for assets (the fund units) based on the values of the underlying illiquid properties.  Like bank runs, things can go haywire pretty fast when too many investors try to sell their units at the same time.

Even establishing fair pricing of the units is a problem. The unit pricing is based on appraisals of the properties which everyone knows have some uncertainty.  Normally, investors live with it.  In rapidly deteriorating market conditions, the appraisal uncertainty can shift from a chronic to an acute state.  In a sharp market downturn, trading volumes tend to fall dramatically and appraisers tend to find themselves with little or no transaction evidence upon which to estimate the size of the falls in values that has occurred.  The basic problem is that real estate transactions cannot take place as quickly as market sentiment can change. It is then impossible for the private real estate market to generate hard evidence of short-term price changes due to the length of transaction times that, at a minimum, are measured in weeks and, typically, take months.  Adrian Benedict,  investment director of Fidelity International’s real estate arm, summed up the problem well last year.

“What we have seen [is] valuers stating you cannot necessarily rely on the independent valuation as a true gauge of pricing in the market given uncertainty,” he said. “At the heart of it is their concern that funds, particularly those that are daily dealt, are trading on prices which cannot be truly ‘marked to market’ just now — sentiment may have turned negative and pricing is possibly falling but in absence of any deals actually having completed, the valuer can’t mark down valuations.”

In reality, they did!

The funds needed to ensure that the exiters weren’t able to exit at unit prices that were too high (and did not reflect any short-term price falls) and that the remainers weren’t paying the paying for this privilege.  In order to ensure fairness to exiters and remainers, most of the funds had to either prevent redemptions and/or make what is termed a “Fair Value Pricing Adjustment” to reflect estimated asset value changes that have occurred due to a change in market conditions, abnormal uncertainty in the appraisal in a period of stressed market conditions and the possibility that assets will have to be sold in an abnormal sale process to meet redemption demands.

Easy to say, harder to do.  In reality, different funds took different guesses at this adjustment.     There don’t seem to be any easy answers here.  However, my colleague Steven Devaney and myself think that in periods of such short term volatility, you have to look at what is happening in the listed real estate sector where you can see actual hard evidence of price changes.    Controlling for their different levels of gearing (but not exposure to development, or non-UK holdings), we estimate that the changes in the share prices of the major REITs in the week following the referendum

Geared and ungeared price changes of UK REITS from 23-30 June 2016

  Estimate of gearing on 23 June Share price change from 23 to 30 June Ungeared share price movement
Land Securities 23% -12.7% -9.7%
British Land 33% -20.4% -13.6%
SEGRO 33% -7.6% -5.1%
Hammerson 43% -8.8% -5.0%
Intu Properties 52% -8.6% -4.1%
Derwent London 19% -23.8% -19.2%
Shaftesbury 22% -8.3% -6.5%
Great Portland Est 20% -18.7% -14.9%


Segro provide a reasonable proxy for the warehouse sector, INTU for the shopping centre sector etc. Overall the average implied price change was a fall of 10%.  It’s not that far off what many funds actually did.  It’s pretty rough and ready and can be refined but in the absence of any other evidence, it’s better than nothing.


Exposing Wired

James Dearsley’s Proptech blog had an interesting link to some expert views on the future of the office over the next 10 years.  Although I do have a sneaking suspicion that most of it could have been written ten years ago and still sound current – more sustainability, more mobility, more flexibility (shorter leases!), informal workspaces  more playful, domestic etc.  I did find out that we’re just about to have our first WELL certified building in London and about yet another certification – WiredScore (Platinum, gold etc.).   You can read more about them here in the ever useful Designingbuildings Wiki.

Telegraphing land promoters

Interesting that land promoters have been attracting attention in the very mainstream media.  Isabelle Fraser had a very good piece in the Daily Telegraph last week on their activities.  Despite the rather melodramatic title of the piece, it seems pretty well balanced and informed.  I’d have a few quibbles.

It accepts rather uncritically the Shelte-ish comspiracy theory that there’s some type of oligopolistic collusive behaviour here that is pushing up house prices.

by charging a premium for a clean site that’s ready to be built on, it forces developers to increase house prices to recoup the high outlay on land, while cutting the viability of building affordable homes.

“Land promoters deliberately pump the cost of land higher and higher, then reap the rewards when they sell it,” says Catharine Banks, policy officer at Shelter. 

In reality, land promoters don’t control land prices and house builders don’t control house prices.  Don’t get me wrong, generally promoters, land owners and house builders will typically want land and house prices to be as high as possible so that they make as much money as possible.  If Taylor Wimpey could sell their houses for 100% more, they would…but prices are set by complex mechanisms of supply and demand.  It’s not a perfect market by any means – but I think that the pricing power of these groups in a fairly competitive market is exaggerated.  It’s a bit like blaming estate agents for the price of housing – they must really ruthless and clever in Kensington, Westminster etc.  It just distracts from the underlying structural problems in the ‘broken’ housing market

I’m also surprised that

Last year Gladman sold 10,000 plots over 50 sites on the edges of towns, mainly to SME housebuilders,     

Given that the typical SME builder produces under 20 houses a year, then it means that Gladman are dealing with hundreds of small land sales.

Real asset?

I’ve been writing here about the emergence of infrastructure and the expected pressures to integrate it into the real estate curriculum.  We’re starting to see its emergence start to produce academic texts.   Edhec Business School, and specifically the Edhec Infrastructure Institute, have been producing high profile output in this area.  They had an interesting article in the FT this week.   A couple of academics from there have published a noteworthy book on infrastructure valuation.  You can check it out here.  It looks like a fairly heavy duty but interesting corporate finance approach to valuing the equity and debt cash flows that infrastructure projects generate and costs nearly £250.   I hadn’t seen it before but I did expect that, like real estate, we would see many of the same types of sub-disciplines.   The publisher of infrastructure valuation (a specialist in private equity topics)  also have other tombs Best Practice in Infrastructure Asset Management and, with a revealing large focus on regulation, Managing Risks in Infrastructure Investments.   All cost a lot.  Possibly better value – but with a different focus is Infrastructure as an Asset Class: Investment Strategies, Project Finance and PPP by Barbara Weber and Hans Wilhelm Alfen.   Sign of the shift?  One of my colleagues at Reading (school of Real Estate and Planning) has just left us to go to UCL to work on infrastructure in the School of Construction and Project Management .

Automation to the rescue?

The RICS have just published Remit’s (Bob Thompson’s and Andrew Waller’s) research that they commissioned on how, let’s call it, automation might affect the (it sounds increasingly archaic) surveyor.  I may be being a bit unfair here – but there is a more than a hint of “the machines are coming to take your jobs and your fees” about it (“The burden of this risk is likely to fall disproportionately on…”).  To be fairer, the report is a bit more nuanced than this.

I’ve been waiting for this piece of research to come out for a while.  I’m a bit disappointed in it.  The research focuses on tasks and, recognising the risk of technological determinism, does set out different scenarios.  However, the 42 tasks examined seemed fairly broad (space management, manage leases etc.).  I would have expected to see these ‘tasks’ broken down and their production chain evaluated in more detail.  The result was that there was little detailed consideration of how the different components of often intricate production chains could be affected by automation and, therefore, any detailed insights into the different roles and tasks.  I suspect (hope) that there was much more analysis underpinning the findings that hasn’t been reported.

John Naughton wrote a really good piece recently on the importance of focussing on tasks rather than jobs and of the difficulties in predicting impacts of automation on jobs compared to tasks.  He sees the recent concern with AI, ML etc. as one of our regularly recurring bouts of automation anxiety (and I remember Right Space, Right Price back in the 1990s).

In the 1960s, a Presidential Commission in the US set up in response to one these automation panics concluded that “The basic fact is that technology eliminates jobs, not work”.  The key issue is whether automations substitutes or complements what workers can do.  If interested, you should read David Autor’s highly readable paper on the topic which discuss the often unexpected effects of automation.  Who would have thought that the number of bank tellers would rise after the introduction of ATMs?

If you look at something like property management, the scope of the job has tended to change as traditional tasks have become de-skilled.  As rent collection, service charge collection, record keeping, data collection, reporting etc.  have become more and more automated – and better quality –  new tasks have emerged.  It’s only in the last two decades that customer relationship management, sustainability practices, health and safety, and other have become standard in property management.

Where automation eliminates monotonous tasks and allows workers to switch to more fulfilling tasks, then it’s good news.  Clearly, there will be some losers but there’s also likely to be many winners.  We tend to be good at identifying the former and not so effective on the latter.  In the UK, we also tend to be pretty bad at managing the distributional effects of such economic changes.  Perhaps we should be celebrating the fact that it’s the mundane, routine functions are most likely to be automated and trying to work out how we ‘insure’ the losers?

Someone once said the institutions try to preserve the problem to which they are the solution.  If the RICS is the solution, then maybe we do have a problem.

The fall of the mall?

The FT has covered the issue really well in the last few months and it’s a bit like an advert for the Mall of America in Minnesota but the Observer had a good piece on the decline of the US retail sector yesterday.  In addition to the statistic that the US has five times more retail space per capita than the UK, it had a few new eye-catching facts

It has been three years since a major new shopping mall opened in the US, leading even some mall operators to speculate that the last one has already been built. Of the roughly 1,200 spread across the country, less than half are expected to be in operation five years from now.

There may some journalistic hyperbole here given the ULI forecasts for retail rents.  It’s hard to reconcile the two.