The growth of limited partnerships has been spectacular, with capital flowing to the sector reaching a peak in 1999. But there is still room for property unit trusts, which have a total worth of over £9bn and account for around 5% of the institutional market
With hopes of a Reit-type vehicle being introduced into the UK indirect real estate market continuing to fade, the growth of limited partnerships has been phenomenal over the past few years, peaking in 1999. Investors like them because they give relatively easy access to specialist and expert management and large or rarely available stock.
According to Richard Plummer, chief executive of Pricoa Property: “They have special appeal to some of the biggest property investors – insurance companies and pension funds. The attraction for them is that the vehicles are tax transparent and are often leveraged which can enhance returns.”
Plummer claims to be one of the earliest to have launched an LP with the establishment of TransEuropean Property Limited Partnership I in 1991, judging it to be a more flexible structure while retaining its tax transparency. “This was important as it was the first time we had gone out to raise money from non-resident pension funds to invest in Europe-wide property. We were lucky in attracting 14 limited partners, 12 of which were from outside the UK.” Pricoa now runs eight European and sector-specific vehicles; altogether it has around €3bn worth of assets under management, €2bn of which is accounted for by LPs.
Ian Cockburn, chairman of Lend Lease Europe Real Estate Investments, says the company has the largest LP in the UK “and probably in Europe too”. The Lend Lease Retail Partnership is a £505m LP with 16 investors owning a 25% stake in Bluewater, the UK’s newest and highly acclaimed out-of-town shopping centre, and the whole of Touchwood shopping centre in Solihull; all the participants in the all-equity venture are UK, apart from Irish Life. The Lend Lease Overgate Partnership, made up of five institutions plus Lend Lease, owns the £130m Overgate centre in Dundee. According to Cockburn: “The advantage is that it gives funds the opportunity to invest in, for example, large shopping centres that otherwise they couldn’t get into. They also buy into the particular skills in running shopping centres. We manage the partnership by making participants feel they own the asset directly, so it’s operationally transparent as well as tax transparent.”
Aberdeen Celexa Property Investors has created four LPs over seven years totalling £500m of equity plus some debt. According to Andrew Thompson, director of new business: “We have a range of investors including two Dutch pension funds. We cover the Netherlands and the Nordics and there is a lot of interest. For institutional investors you have the unauthorised trusts, which have serviced the pension funds and exempt funds very effectively. But when investors look for ways of getting into single assets or emerging or specialist sectors you need a vehicle to cater for tax payers alongside the exempt funds and LPs are the best vehicle.
Use of gearing
“The key reasons for the popularity of LPs are the increasing trend for investors towards indirect investment, managers want to get hold of specialist sectors and specialist management expertise. Investors also want to get hold of the larger assets and they want to use gearing,” he says, adding that the market has been slower due to the falling stock market and there have been fewer vehicle launches.
A criticism that has been levelled at LPs is that there is no secondary market. But Cockburn says that when one of the Bluewater participants, Guardian Assurance, sold its 25% stake to CGNU and Hermes 12 months ago, “it was an easy trade – for both buyer and seller, easier than selling a property”. And he adds: “Interestingly, the sale was at a 10% premium to net asset value.”
But new research published this month in a report by Oxford Property Consultants and the University of Reading for Grosvenor, Invesco Real Estate Advisers and the Investment Property Forum has found that advisors, investors and managers accord that LPs are far less liquid than buildings. “There is no established secondary market for LP shares, with only six or so trades having been recorded so far; investors feel the need to undertake double due diligence, examining both manager/vehicle issues as well as property issues.
And pre-emption rights, still prevalent, inhibit the willingness of new investors to expend time and money in pursuing shares in LPs which are likely to be bought by existing partners. In addition, fee levels can be slightly higher on LP shares than when selling buildings.” The report gauges that the subject of greatest interest in the private property vehicle market is the potential for secondary market trading of LPs. It finds there is an enormous demand for more liquidity, but scepticism as to whether this is achievable.
The vogue for LPs has cast a shadow over property unit trusts. The important difference is that PUTS are open-ended and investors can go in and out with greater ease. Is this a big advantage?
According to Plummer: “It depends who you talk to. There is a well-established school of thought that says the closed-end focused strategy of a limited partnership is a good thing as investors are signing up to an articulated strategy; a lot of investors like that. Others quite like the open-ended format in which the managers run a vehicle and they can come and go at any time. So it clearly has a place.
“Institutional investors in recent times have increasingly favoured a focused specialist approach which is consistent with a closed ended life vehicle,” he says.
Plummer adds: “The beauty of LPs is that they appeal to a wide international audience, and can as easily invest in UK as throughout continental Europe. Pricoa invests in 112 European countries. PUTS can do that in principal and I run a pan-European PUT that has been operating since the 1970s but to my knowledge there isn’t another open-ended PUT specialising in continental Europe.”
William Hill, managing director of Schroder Property Investment Management thinks that PUTS have significant advantages. “Our experience of running unit trusts for the last 30 years, in particular the last 10 years, is that the unit trust model has a lot of attributes on top of limited partnerships that are very attractive. We see room for both but we see LPs as a club-like deal with three or four investors and unit trusts are more suitable for the development of investment funds that people can buy in and out of,” he says.
This summer Schroder and specialist London development and investment company Benchmark teamed up to create a new £300m PUT. Benchmark sold eight properties into the vehicle – WEL Partnership unit trust – for £249.5m and has taken an initial 73% stake in the fund. All the buildings are in the West End of London. The partnership is buying £47.9m of property from Schroders Exempt Property Unit Trust.
Benchmark and Schroders plan to raise the value of assets within the vehicle to at least £1bn within three years. Says Hill: “We felt there was a large part of the investment market for both institutional and overseas investors and high net worth individuals. Through a combination of lot size and availability of stock, they were finding it difficult to get into the West End, one of the most important European markets. The product aims to solve this.”
Easy allocation
“If an investor wants exposure to the West End then he can transact in a matter of hours; there’s no stamp duty on it and he gets a tax position as if he was investing in property direct. Allocation is easy too, he can deal in units to the precise amounts he needs for his weighting – with nominal transactions costs,” he says. “It’s still early days but we have over £2bn of assets under management in these specialist funds from zero in three years.” This month Schroder launched a £250m property venture fund, Gresham Property Partners, which will allow investment from any category, including high-net-worth individuals. Already, the seven-year limited partnership has raised £66m of equity from three unnamed institutional investors. It is set to be a high-risk, high-return vehicle acquiring properties with projected returns from the low to mid-teens.
The fund is set to reach £250m in December 2001, when up to £34m of further equity will be raised, along with £150m of gearing. A Channel-Islands subsidiary of Schroders is also investing.
Richer Cross at BC Asset Management, which specialises in retailing tax-transparent property funds, says: “It’s still early days, but there is a growing interest in these types of vehicle, especially for high-net-worth individuals and international institutions.
“But not all of them are getting off the ground, or even getting third-party backing, so it is impressive that Schroders has got the capital together, especially when markets are so volatile.”
To date, UK real estate figures largely in both LPs and PUTs. According to Oxford Property Consultancy and Reading University the overwhelming view is that the relative popularity of UK property is not do to with structures, rather it is to do with the lack of interest shown to date by UK investors in overseas property. This is set to change.
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LPs and PUTs |
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There are around 100 limited partnerships (LPs) that can be described as collective investment schemes. Many more limited partnerships exist but they are more accurately described as joint ventures. The total value of the sector equates to about £14bn in the UK, with over £4bn of capital residing in the top 10 funds. Source: Oxford Property Consultants/University of Reading Property unit trusts (PUTs) have a total worth of just over £9bn, accounting for around 5% of the direct institutional market. The unauthorised, that is, for institutional investors, property unit trust market (UPUT) contains 40 trusts. Roughly 75% are based onshore in the UK, with the remaining ten being offshore trusts. The onshore-based UPUT market has a current market capitalisation of £6.8bn, in comparison to the offshore market, which is less than one third the size at £2.1b. Source: Oxford Property Consultants/University of Reading |
