News analysis: Is the PAIF about to take off?
SEPUT's conversion could be just the fillip the hitherto moribund PAIF market needs to take off, says Shayla Walmsley.
Would-be property authorised investment fund (PAIF) managers will tell you institutional take-up of the open-ended structure would have been much more buoyant by now were it not for the financial crisis. Following the structure's arrival in 2008 in a non-conducive market environment, potential PAIF funds were preoccupied by cash flows. Between then and now, the vehicle never really took off.
Until Schroders recently announced that it had shareholder approval to convert its £1.2bn (€1.5bn) SEPUT core UK fund, appetite for the PAIF structure - which is exempt from UK corporation tax on its investment income if it invests directly in commercial or residential property, or in REITs - had been negligible. Schroders has got the institutional ball rolling. But is this sufficient momentum in the PAIF structure to attract pension fund interest?
There are a couple of reasons why the Schroders announcement might make a difference to the overall potential market for PAIFs. First among them is its size. The new PAIF is the largest to date and one of the first to target institutional investors. That Schroders has put its weight behind the structure will likely make PAIF a credible proposition for institutional investors other than the pension fund and charity SEPUT shareholders who voted for conversion.
Most PAIFs currently in development will target retail investors. LGIM plans to launch a retail PAIF following clarification in November last year that transfers between the PAIF and feeder funds would not be whacked by capital gains tax within a putatively tax-efficient structure. Hearthstone will launch its residential PAIF - not a conversion but a new fund - in September. Standard Life Investments (SLI) will target retail investors with a planned (but not scheduled) PAIF. ("But that's not to say we won't do anything on the pension side," says head of wholesale and listed real estate funds Andrew Jackson.)
Against this retail bias, the Schroders fund will target qualified (that is, institutional) investors - which means it can open the vehicle not only to UK institutional investors but also for the first time to overseas pension funds and insurers.
Fund manager Philip Nell at Aviva Investors, which is looking to convert its institutional property trust (AIPT) into a PAIF, reckons the result of diversifying the investor base will be more stable pricing and better liquidity. Wilcox at Schroder Property reckons greater liquidity as a result of opening up the fund to institutional investors may improve performance.
It is also less hassle, with what she claims are two administrative advantages over the existing structure. First, unit holders can opt to reinvest income automatically if they want to. Second, exempt investors will not have to put in monthly claims for deducted tax on income.
Will all this be enough to kickstart institutional investor interest? There are still reasons why not. Enough fund platforms to matter have now tweaked their operations to allow for the required three-way income streaming into rent-derived, dividends on equities and interest on cash deposits. But even if the platforms are up to the job, and assuming the costs of making them so are not passed on to investors, Nell believes the structure is still too complicated, especially because a PAIF will need to include a feeder fund for large investors breaking through an existing 10% holding rule.
Continuing, if minor, barriers do not necessarily rule out a deluge of me-too, however. More than one potential PAIF manager interviewed cited the timeframe of 18 months. Schroder Property believes it will provide a significant fillip to the hitherto slow PAIF market, and Wilcox reckons "several" will be launched within 18 months. Jackson likewise says his firm has no imminent plan for a PAIF, despite industry rumours, but that the inclusion of a PAIF in its product suite "would clearly make sense".
"I'd be disappointed if we didn't have one within 18 months," he says.