Property & Infrastructure Funds Flashcards
What benefits do alternative investments provide?
1) Lower the volatility of the portfolio
2) Provide diversification (low correlation to bonds and equities)
3) Enhance returns / imrpove risk / return
What ways are returns earned through property?
Rental income
Capital Gain
A combination of both
What are the 3 main ways to invest in property?
1) Building a portfolio of brick and mortar propertys
2) Investing in a listed property company / REIT
3) Investing in an open ended fund.
What are the 3 main advantages of property as an asset class?
1) Attractive absolute returns
2) Diversification benefits
3) Relatively low correlation to equities and bonds
What are the four main types of real estate fund?
1) Core Funds - Lower risk / Lower return (usually open ended)
2) Core plus - Low to moderate risk (core but uses leverage to generate plus returns)
3) Value-add funds - High gearing and active management to generate returns
4) Opportunistic - Acquire property from distressed sellers (more similar to private equity funds)
On what basis are open ended property funds priced?
Net Asset Value Basis
What are the two ways that NAV can be valued?
Which is preferred and why?
1) Historic - Price using the last price (risk of undervalued units)
2) Forward - Price using next valuation (no risk of underpricing)
How are property Unit Trusts priced?
Dual Pricing - Bid / Offer Spread
(limits on bid/spreads to stop dealing costs being passed on to consumers)
How are OEICs (Property authorised investment funds) priced?
Single Price
No bid-offer spread, pricing difference betwen buy / sell comes from fees levied on entry / exit.
Where do ETFs trade and how does this effect the price?
Property ETFs trade on the stock exchange meaning they should trade close to their NAVs.
What is an example of a close ended property fund?
A REIT
What is the pricing mechanism for a REIT?
A REIT reports its NAV daily to the exchange.
Supply and demand dictates the price of the REIT.
Can trade at a premium or a discount.
How do you calculate the premium / discount for a REIT?
(Share Price - NAV per Share) / Nav Per Share
Divide NAV by shares in issue to calculate NAV per share.
3 things:
What is the risk of loss in a property fund dependant on?
1) Categories Invested in - e.g. residential, commercial, agricultural
2) Concentration - little diversification or a small number of holdings
3) Strategy - direct or indirect
Why are volatility and liquidity the most significant risks to property funds?
Volatility can lead to crashes causing significant losses.
It can also lead to a rush on redemptions, given the illiquid nature of the underlying portfolio, this can lead to the gating of funds.
e.g. following the UKs vote to leave the EU, investors had their redemptions suspended.
What was the FCA’s solution to the liquidity mismatch in open-ended property funds?
Establish LTAF (long term asset funds)
Designed specifically to invest in long-term illiquid assets (some LTAFs have a notice period >than 90-180 days)
Original suggestion was a 180 day notice period.
Why do close ended funds not have the same liquidity issue?
In REITs and Property Investment Trusts, there are fixed numbers of shares - when an investor sells, underlying assets do not have to be sold.
Indirectly invested open ended funds also do not suffer this liquidity issue.
What happens to property trusts when interest rates rise?
Investors seek safer sources of income (e.g. Govt bonds) and property funds see their demand fall.
Despite higher rents / occupancy rates - higher rates / inflation are bad for property funds.
Give 4 changes in market conditions that can cause poor outcomes for property funds:
1) Oversupply in housing
2) Reduction in tenant demand
3) Tenants can meet landlords obligations
4) Landlord cannot lease on favourable terms
What are 4 other risks of property funds?
1) Market Risk - Political, Legal and Economic factors
2) FX Risk - Investments overseas come with FX risk.
3) Gearing - Gearing can adversely affect returns (debt can also be agreed on poor terms)
4) Valuation - Property is hard to value - can create discrepancies
What is the performance of property closely tied to?
The performance of property funds is tied to the economy.
Strong Economy = Demand for housing (pushes up rents / prices)
Investors commonly purchase property to hedge against inflation.
