Weak equities markets and issues in the UK pension industry have encouraged widespread interest in commercial property amongst small investors. Anecdotal evidence suggests that individual investors are becoming an increasingly important segment of the UK market. However, until now, there has been little data and information available in the public domain to confirm this view. Moreover, our knowledge of small pensions and charities with assets of less than £30m (€42m) has been partial at best.
In the context of a continuing dialogue with the UK government over the introduction of REIT-like vehicles, this information gap has proved problematic. It has been difficult to gauge the likely appetite for REITs amongst small investors because there has been no information about the depth of this market, their current exposure to commercial property, or the level of latent demand for such vehicles.
In February this year, the three leading UK property industry bodies (IPF, BPF & RICS) funded a research project under the auspices of the IPF/IPF Education Trust Joint Research Programme to shed some light on the needs of small investors. Undertaken over four months by a team from Seven Dials Consulting, Oxford Property Consultants and Experian Business Strategies, the research approach focused on the different perspectives of these investors and the role of their advisers. The needs of small investors were then matched up to the existing range of available commercial property investment vehicles.
The research found that the number of small investors is substantial and that they have significant assets at their disposal. Some 6.5 million active individual investors own over £600bn of investment assets, and in excess of 200,000 small pension schemes own almost £80bn of assets.
However, surprisingly little is invested in commercial property. The indirect exposure of individuals is less than 4%, and small pension schemes have only 2% of their assets in commercial property.
Given that there is widespread awareness of the strong relative performance record of commercial property and significant levels of interest in investing in the asset class what's holding investors back? Well, there appear to be three principal obstacles to small investors gaining greater exposure to commercial property:
q Perceptions about commercial property as an investment asset. Individual investors cited affordability and risk as the principal barriers whereas small pension funds were more concerned with high entry costs, risk and illiquidity;
q Low levels of knowledge and understanding amongst investors and their advisers. For individual investors, there is uncertainty about how to invest and where to go for information. Commercial property is only just coming onto the radar screens of financial advisers and they are only beginning to understand the attributes and risks associated with investing. This situation is compounded by the general lack of pricing and performance data, in part reflecting the unlisted nature of most commercial property funds;
q The limitations of available products. There appear to be a wide range of investment vehicles available to small investors but there is often limited within-category choice. For example, there are currently only three authorised property unit trusts in the UK.
Products are viewed as complex and illiquid, initial entry fees are perceived to be high and there are real concerns about the offshore and unregulated character of many products. Moreover high minimum investment levels deter individual investors.
The research findings flag up what is needed. First, and foremost, it is products that more closely meet the needs of small investors, both listed and unlisted:
q Familiar, efficient, liquid and straightforward structures that are regulated onshore will appeal to low risk investors with small sums at their disposal;
q More sophisticated investors have a greater preference for unlisted vehicles and a greater acceptance of gearing;
q Small pension funds and charities prefer indirect vehicles and there is evidence of an appetite for unlisted products as small pension funds and charities move their asset allocations away from equities.
In this context discussions with UK Government concerning the introduction of REIT-like vehicles are to be welcomed. While the dialogue continues, new product offerings are being brought forward.
However, product innovation will not be sufficient to fully open the door to small investors in property. It remains clear that significant efforts need to be made to deepen the knowledge and understanding of commercial property amongst small investors and their advisers. The first steps have already been made (see box) but there is a need for a co-ordinated education programme and support for improved data, ratings, research and analysis.
Stephen Palmer is a director of Seven Dials Consulting
Knowledge partnership needed
Recent research highlights the importance of improving the knowledge of both investors and their advisers. A cross-industry initiative to improve the understanding of commercial property investment amongst financial advisers in the UK has been a resounding success and demonstrates what can be achieved with co-ordinated use of modest resources.
Recognition of the need to provide financial advisers with access to reliable and unbiased information on commercial property investment prompted the Investment Property Forum to commission a guide to commercial property investment. With funding and support from the Investment Property Forum Educational Trust, British Property Federation and RICS, the guide was prepared by Seven Dials Consulting with input from Deloitte & Touche (tax) and Mayer, Brown, Rowe & Mawe (legal and regulatory).
Understanding Commercial Property Investment: A Guide for Financial Advisers provides private client investment managers, private bankers, wealth managers, pensions managers and independent financial advisers with information on the attributes of commercial property as an investment class and insights on the mechanics of the market. It also gives an overview of the commonly available indirect product structures, together with insights on the associated risks, the tax implications and regulatory considerations.
The first edition of the guide was launched at the Society of Financial Advisers’ Annual Conference in November 2003. Described as an “excellent briefing paper for financial advisers” by former Hermes chief executive Alastair Ross Goobey, it has since proven to be essential reading for many. There are now in excess of 7,500 copies of the 40-page document in circulation and a second edition being prepared.
Earlier this year, a series of regional seminars were promoted by the Society of Financial Advisers to its membership. During the Summer, Seven Dials Consulting presented material drawn from the guide to a total of almost 400 financial advisers at nine events throughout the country.
While the guide has been an undoubted success, there is more to do. There are estimated to be more than 25,000 financial advisers in the UK, so many have still to become conversant with attributes and risks of commercial property investment. Moreover, as the knowledge and understanding of financial advisers grows, so will their appetite for independent, third-party research and information.
Copies of the guide can be obtained from www.ipf.org.uk or www.7dials.com