UK funds consider switching to indirect

News

Rachel Frampton

02 December 1999

In recent weeks, two funds have sold a combined £250m of direct property assets to international investors in a bid to introduce more liquidity into their property holdings.

A survey of 62 pension funds, life and insurance companies, which control direct property assets of £20bn, found interest and participation in derivatives has increased sharply in the past two years. The survey, by Jones Lang Wootton, revealed that 43% of funds are enthusiastic about indirect property investment, compared with 25% in 1994.

UK funds are not alone in seeking higher liquidity, lower management costs and greater flexibility in their property investment; the move towards indirect investment is already established among Dutch pension funds, and is gathering momentum in Sweden.

JLW’s survey found that the most popular forms of indirect investment available now are quoted property companies, open-ended funds and single asset joint ventures.

Future demand was for specialist and sector-focused vehicles, while participation in synthetic instruments was also expected to grow.

A number of funds are taking steps to reduce their direct property exposure.

Last month Colonial Mutual Life Assurance Society sold its entire £130m property portfolio to a consortium of US and UK investors comprising GE Capital, Leon Black’s Apollo Real Estate Investment Fund, John Beckwith’s Portfolio Holdings and Pelham Partners run by former Goldman Sachs bankers Roger Orf and Don Blenko.

The portfolio consists of 83 commercial properties across the UK, 38% in offices, 34% in retail and 28% in industrial.

Damian Condon, head of investments at Colonial Mutual, said: “Commercial property is relatively illiquid and requires specialist management skills. We believe that any future property market opportunities can be exploited without direct investment into bricks and mortar, but through equities and other instruments.”

The Colonial Mutual deal was followed almost immediately by Friends Provident’s announcement that it was selling a £120m portfolio of central London property to Benchmark, a UK-quoted property company, in exchange for a 35% equity stake in the company and £80m in cash.

Benchmark is backed by the Malaysian investment group Hong Leong and Singapore-listed First Capital Corporation.

Friends Provident fund manager Andrew Vaughan said the sale was primarily to reduce the £1.1bn property fund’s overweight exposure to central London. But it hoped to boost its returns by investing indirectly in Benchmark. “We saw that properties would benefit from intensive and entrepreneurial management,” said Vaughan.

Pressure from UK funds for indirect property investment vehicles is mounting, with up to 20% of institutional investors indicating that they would probably abandon direct property altogether if suitable indirect vehicles were available. In recent weeks, two funds have sold a combined £250m of direct property assets to international investors in a bid to introduce more liquidity into their property holdings. A survey of 62 pension funds, life and insurance companies, which control direct property assets of £20bn, found interest and participation in derivatives has increased sharply in the past two years. The survey, by Jones Lang Wootton, revealed that 43% of funds are enthusiastic about indirect property investment, compared with 25% in 1994. UK funds are not alone in seeking higher liquidity, lower management costs and greater flexibility in their property investment; the move towards indirect investment is already established among Dutch pension funds, and is gathering momentum in Sweden. JLW’s survey found that the most popular forms of indirect investment available now are quoted property companies, open-ended funds and single asset joint ventures. Future demand was for specialist and sector-focused vehicles, while participation in synthetic instruments was also expected to grow. A number of funds are taking steps to reduce their direct property exposure. Last month Colonial Mutual Life Assurance Society sold its entire £130m property portfolio to a consortium of US and UK investors comprising GE Capital, Leon Black’s Apollo Real Estate Investment Fund, John Beckwith’s Portfolio Holdings and Pelham Partners run by former Goldman Sachs bankers Roger Orf and Don Blenko. The portfolio consists of 83 commercial properties across the UK, 38% in offices, 34% in retail and 28% in industrial. Damian Condon, head of investments at Colonial Mutual, said: “Commercial property is relatively illiquid and requires specialist management skills. We believe that any future property market opportunities can be exploited without direct investment into bricks and mortar, but through equities and other instruments.” The Colonial Mutual deal was followed almost immediately by Friends Provident’s announcement that it was selling a £120m portfolio of central London property to Benchmark, a UK-quoted property company, in exchange for a 35% equity stake in the company and £80m in cash. Benchmark is backed by the Malaysian investment group Hong Leong and Singapore-listed First Capital Corporation. Friends Provident fund manager Andrew Vaughan said the sale was primarily to reduce the £1.1bn property fund’s overweight exposure to central London. But it hoped to boost its returns by investing indirectly in Benchmark. “We saw that properties would benefit from intensive and entrepreneurial management,” said Vaughan.