6 - Property and Alts Flashcards
Key characteristics of alts
low correlation to trad investments
higher return to trad
esoteric and illiquid
inflation hedge (prop and gold)
longer lock up periods
unique risk profiles
complex
higher min investments
benefits of alts
lower vol of overall portfolio
low corr = diversification benefits
improve risk return profile of portfolio
liquidity of open ended vs closed ended property funds
direct open ended -
generally liquid, sales are purhcased by fund manager, if insufficient cash they sell underlying to fund purchase
- if manager is unable to sell asset then fund can become illiquid as in 2016 post Brexit= open ended funds suspended
closed ended
REITs - trade on XC so assets dont have to be sold to meet redemptions.
indirect open ended - liquid as they invest in real estate securities which trade on XC as does fund itself
Recent property fund news/laws
2019 - £2.2bn outflows due to sentiment surrounding BREXIT
COVID - redemption suspension as professional valuers couldn’t accurately value commercial property assets
FCA CP20/15 - investors must give 180 days ntice to redeem investment in direct open ended property funds to address liquidity mismatch between fund and daily trading
4 main types of real estate funds
core = low risk/return, benchmarked against property index, usually open ended difficult to redeem during market stress
core plus (risk)
=low/moderate risk/return, core plus risk via leverage (40-60%)
value add = higher gearing (60-75%) more active management for higher returns
opportunistic = acquire fr0m distressed sellers in similar nature to PE, typically closed ended
ALSO
Property unit trust
PAIF
ETF
REIT
Property unit trusts and tax treatment
can be auth or unauth (auth for retail, unauth for instit investors)
fund
- exempt from CGT on gains in UK
- income arising in fund is liable to corp tax @20%
unfavourable tax treatment = unsuitable for instit and overseas investors
designed for UK domestic market
offshore unit trusts
tax transparent - fund not liable to income tax or CGT
tax is liable on end investor according to tax position
weaker level of gov protection as less heavily regulated
IA property sector splits
UK direct property
- invest >70% assets directly in UK prop (over 5 year rolling)
- if below 70% for continuous 12 months/<60% for a month - can be removed from sector
Property other
- invest predominantly in prop but dont fit in UK direct
- >70% in prop over 5 year rolling (maybe overseas, maybe <60% in a month)
>80% in property securities
>80% in combo of securities and direct prop
direct and indirect risk vs reward
direct = lower vol over medium/LT
more likely to experience illiquidity issues in times of market stress
PAIF qualification
prop authorized investment fund - tax efficient open ended
- structured as an OEIC
- must carry our property rental bis that generates income from land/share ownership in UK or abroad and/or bis that owns shares in REITS
- 3x distribution streams: rental (property) income, interest income (from prop bonds), other income (divis)
-must prevent corp bodies from owning >10%
tax treatment of PAIF
property investment income = tax exempt
Capital gains = tax exempt
income distros generally ineligible investors have 20% witholding tax deducted
extra tax charges leveied on PAIFs with excessive debt or with corp ownership>10%
feeder funds are common as not all investors eligible to receive distros gross
Property ETF
REIT index trackers
lots track EPRA (FTSE European public real estate association)/ National association of real estate investment trusts (Nareit) global indexes
e.g.
FTSE EPRA Nareit UK
FTSE EPRA Nareit Europe
FTSE EPRA Nareit Asisa Pacific
“” Global
“” Developed
“” Emerging
REITs
REIT = comp that owns and operates income producing real estate (comm or residential)
different from quoted comp that holds property portfolio because - REIT not liable for tax on any income/gains made on prop portfolio but MUST
distribute 90% of this income to shareholders as divi (tax falls on shareholder)
Shareholder will pay CGT and income tax
REIT does not
XC traded - liquid, price based on supply demand so may trade at pre/discount to NAV
Limited partnerships
- unlisted property vehicles
complex structures
single general partner with unlimited liability
multiple limited partners with limited liability and no control over investments (or they lose limited status
tax transparent - taxed on partners rates
established for predetermined no. of years then assets disposed and proceeds distributed
gen partner appoints operator to oversee admin
often housed in Jersey/Guernsey
considerations when investing in prop funds
asset price bubbles
liquidity of listed vs investment funds
permitted levels of gearing
redemption charges/notice periiods
