Anarchy in the UK
For the less intrepid UK investor out on the hunt for returns, the current market landscape is pretty unsettled. From the anaemic fixed-income sector to volatile stock markets, yield is an unpredictable beast. It is tricky to find and capture those that are stable across traditional asset classes. With Brexit continuing to cast a cloud of uncertainty over the economy, finding a steady flow of more secure, asset-backed opportunities is going to be key for constancy.
In fact, one of the few areas of the economy where Brexit has actually had a tangible impact is on the commercial property fund market, with three major funds being forced to suspend withdrawals due to nervy investors looking to take money out.
And yet, somewhat paradoxically, investors looking for better yields and a lower-risk asset to invest in, given the current economic climate, may actually find the answer in property development.
No need to panic
The decision of the property funds to suspend withdrawals isn’t, of itself, as negative as it may seem. Suspending withdrawals is a necessity for commercial property funds in such a scenario. Funding a rush of withdrawals will require the sale of relatively illiquid assets, and time is needed to do this. Otherwise the funds would be forced to sell assets at fire-sale prices, which would simply depress the fund’s value further and prompt more withdrawals, creating a vicious circle.
And there is every sign that this is a case of a short-term shock caused by anxious investors, rather than anything deeper. Brexit is unlikely to meaningfully affect any of the big picture fundamentals that make British property an attractive destination for global capital. The long-term factors driving demand—the relative stability and maturity of the market, the great infrastructure, a rising population set against an acute housing shortage—are unlikely to shift, and do not depend upon British membership of the EU.
We continue to see positive investment news in the UK property market. Developer Bericote Properties agreed a £56.3 million forward-funding deal with Tritax Big Box REIT for its development in the West Midlands, and Amazon has continued the expansion of its logistics network in the UK, signing up to occupy the 220,000-square foot Big Stan building in Stoke-on-Trent, as well as rapidly expanding its portfolio with more than 25 urban logistics facilities around the country.
What the post-Brexit fallout in the commercial property fund market does illustrate is that investing in property development can be a risky business. Investing in an already-built property with an existing yield is one thing, but investing in property development at earlier stages is another. It is highly complex and generally not suitable for the high-street investor.
This means we also need to explore innovative ways to de-risk this sort of investment. Syndication, for instance, can bring multiple investors together to jointly fund a project, which spreads the risk across a number of investors and reduces the risk taken on by each individual investor.
Syndication as a concept is not completely new, but it has historically been a costly and difficult process, often requiring a lead investor. With the rise of automated online platforms, this need no longer be the case.
Innovative new ways to structure syndicated investments cut out a lot of the logistical pain associated with the process in the past, automating and streamlining as much of the administrative and legal work as possible, for maximum efficiency. These give investors the security of a first charge, which is held by a security trustee, along with administration and quantity surveyor checks and balances, which regulate the capital expenditure.
Of course, the price of lower risk is lower returns. But even so, in today’s low-yield environment, the potential returns would still look very attractive indeed to a large swathe of investors, compared to the alternatives on offer, especially in a post-Brexit environment. In some cases, this approach to syndication can deliver returns of more than treble that of the best UK savings accounts. Developers also benefit from having the freedom required to orchestrate the development.
Unlocking this money for property development could have the dual benefit of providing investors with an attractive balance of yield and risk, while helping small to mid-sized developers to get the funding they need.