As yet another major merger between two UK property funds is sealed, Christopher Walker finds that the writing is on the wall for the industry
Less than a year after L&G and Federated Hermes merged two longstanding UK real estate funds into a £4.7bn (€5.49bn) vehicle, another major fund tie-up has shaken up the industry. In July, Patrizia and Columbia Threadneedle announced they had merged the 50-year-old Patrizia Hanover Property Unit Trust (PATH) with the Threadneedle Property Unit Trust (TPUT) to create a £1.5bn vehicle.
The move is the latest sign of the ongoing consolidation across the UK property funds market – and experts suggest more is to come.
James Coke, executive director and fund manager for UK real estate at Columbia Threadneedle Investments, says the PATH-TPUT merger is part of a broader trend. “The role of UK open-ended property funds is evolving and managers need to ensure their funds remain relevant to investors over the long term,” he says. “In our view, scale is becoming more important. Larger funds are typically better placed to provide diversification, manage liquidity, absorb operational complexity and pursue asset management and sustainability initiatives across their portfolios.”
He therefore expects consolidation to continue across the sector, though it “should only occur where there is a strong strategic fit between portfolios, investor objectives and long-term investment strategies”, he says. “Consolidation should not be pursued for its own sake.”
In Patrizia-Columbia Threadneedle’s case, the strategic fit was very clear, asserts Coke. “The merger improved diversification across assets, tenants and asset sizes, while creating greater scale within the fund… bringing together smaller assets that can support income and liquidity with larger assets that offer asset-management and reversionary opportunities. This created a broader and more balanced portfolio that we believe is better positioned to navigate future market cycles.”
He adds: “By combining two complementary portfolios, we were able to increase scale, enhance diversification and strengthen the long-term resilience of the fund, while preserving exposure to a broad range of UK real estate assets and tenants.”
Domiciled in Jersey since 2002 and originally established in 1967, TPUT holds around 100 assets. The PATH vehicle, acquired by Patrizia via its takeover of Rockspring in 2018, holds around 10 assets.
Coke says the merger also provided a number of particular longer-term benefits. “The combined portfolio offers opportunities to enhance value through active asset management, while the solar park at Westcott in Aylesbury has the potential, subject to further due diligence, to support access to domestically generated green energy for occupiers.”
Decline in value
Peter Hobbs, managing director of investment consultancy Bfinance, concurs that the latest merger represents “another step in the long-term consolidation of the UK real estate fund industry”. Over the past decade, he observes, “the industry has been under pressure and suffered significant contraction”.
He suggests the best evidence of this is the £25bn decline in value – or nearly 40% – in the MSCI/AREF UK property fund universe between Q1 2016 and Q1 2026, from £65bn to just under £40bn. “The most significant decline was in the ‘balanced funds’ that contracted by 50% over this period,” he notes.
Hobbs acknowledges that “part of this decline was due to the poor performance of the market that has suffered from macro shocks including Brexit, COVID and the 2022/23 rate rises”. These impacts, he points out, mean that over the 10 years to Q1 2026, UK real estate values declined by more than 10%, compared with the 60%-plus increase in values seen in the US.
Nevertheless, Hobbs believes this decline has been compounded by a series of other, often related, pressures. First, many of the products offered to retail investors – particularly Property Authorised Investment Funds (PAIFs) – have reduced in appeal to investors given the poor performance and illiquidity in times of stress. “This has often led to suspensions, closures or reductions in value for specific PAIFs,” he says.
“Second, there has been a reduction of defined-benefit (DB) [pension] capital in real estate funds as those investors have moved into de-risking strategies.” The third is the consolidation of the UK’s local government pension schemes (LGPS) into several pools, whereby these institutions are now seeking to gain exposure to real estate through separately managed accounts or more specialist funds than the traditional diversified fund route.
Structural pressure
Knight Frank Investment Management has been tracking the decline in size of the UK real estate funsd market – and found that it is accelerating. The number of balanced funds has fallen 20% in the last four years, from 25 to 20 (see ‘A shrinking sector, overleaf).
“What was once a stable, institutional gateway into UK real estate is now under intense structural pressure,” says Tony Yu, partner at Knight Frank IM. “The universe is becoming smaller, more concentrated and more challenging for sub-scale vehicles to remain viable because of the exit of key groups of institutional capital. As a result, the choice for many of these property funds has increasingly narrowed to managed wind-down or consolidation with peers.”
One of the most telling statistics is that the number of UK balanced property funds represented in the MSCI/AREF UK Quarterly Property Fund Index has fallen by 27% over the last five years to June 2026. “This is the biggest decline over any five-year period in the history of the index,” says Yu.
“Given the ongoing structural pressures facing the sector, we expect the number of UK balanced property funds to continue shrinking in the near future. We believe scale, liquidity and fund viability are closely connected. Investors increasingly view smaller open-ended funds as more vulnerable to termination or merger, particularly where redemption pressure has reduced portfolio diversification or made the fund commercially sub-scale. In turn, concerns about viability can influence investor behaviour and make liquidity challenges harder to manage.”
The fundamental issue is “the change in the investor base”, stresses Yu. “DB pensions have been de-risking while LGPS pooling has concentrated buying power and increased fee scrutiny.”
Smaller, but more resilient?
While all this may sound bleak, it does not mean the balanced open-ended fund model is broken. “But it does mean it needs to evolve,” Yu emphasises.
“Future success is likely to depend on stronger alignment between liquidity terms and the underlying assets, better redemption management, clearer behavioural incentives for investors, and strategies that can meet the return expectations of the next generation of capital – for example, defined-contribution (DC) [pension] schemes.”
He continues: “The outcome may be a smaller universe of open-ended UK real estate funds, but potentially a more resilient one. The funds that adapt decisively and transparently should remain relevant; those that cannot may find consolidation or wind-down increasingly difficult to avoid.”
Similar views were expressed by veteran property consultant John Forbes last year, when commenting on the L&G-Federated Hermes fund merger: “Funds that are heavily reliant on DB investors face significant pressure to consolidate and to adapt to be more appropriate for DC investment.” UK real estate funds, he said, “face evolution or extinction”.
Hobbs also highlights the importance of attracting new sources of capital, whether through fast-growing DC schemes and retail investors –including through the new Long-Term Asset Fund structure – “or the innovative use of co-investment opportunities for sophisticated investors”.
In addition, he notes: “The fund industry has struggled… to build exposure to most relevant next-generation sectors such as senior living, student housing, single-family living, healthcare, self-storage and data centres. The strong growth of some of these next-generation sectors is a positive sign for the UK fund market.
“If the managers of the funds are able to build exposure to the most relevant and likely best performing sectors, the funds are likely to be able to attract capital and grow.”
