The UK government is being urged to fill a gap in its domestic investment management industry by creating a new onshore fund structure for real estate and infrastructure investors.
The Investment Association (IA) and the Association of Real Estate Funds (AREF) are pushing for the establishment of a professional investor fund (PIF) that would remove the need for managers of closed-ended funds to go offshore.
The IA said this “would allow pension funds and professional investors to invest in real estate and infrastructure through an unlisted, tax-transparent fund structure” with tradeable units, which currently does not exist in the UK.
Were the UK government to take up the recommendation, it could lead to future closed-ended real assets funds being structured in the UK rather than offshore jurisdictions like Jersey, Guernsey and Luxembourg.
Chris Cooper, CEO of UK real estate fund manager DTZ Investors, told IPE Real Assets: “We support the establishment of such a fund vehicle and consider it a simple and highly suitable structure for our future fund launches.”
Melville Rodrigues, partner at law firm Charles Russell Speechlys, who has taken the lead role in structuring the PIF, working with AREF and IA others in the industry, said “many UK fund management houses” were in support.
Lonneke Löwik, CEO of European real estate fund association INREV, said: “The introduction of such a fund would fill an important gap for pension funds, insurance companies and other institutional investors who invest collectively in real estate. It would offer a UK fund vehicle comparable to vehicles that have been available to investors in other European jurisdictions for some time.”
“We support the establishment of such a fund vehicle and consider it a simple and highly suitable structure for our future fund launches”
Chris Cooper, DTZ Investors
Rodrigues proposed the PIF concept last year. Writing in IPE Real Assets, he said the real estate industry should lobby the government to enhance the UK’s competitiveness in a post-Brexit environment.
Since then, the IA and AREF have submitted to the Treasury a request-for-consultation document has been submitted to the Treasury, setting out how a PIF could support the UK “as a global hub for fund management houses”.
Rodrigues said the “UK government and regulator representatives have constructively engaged with this initiative” and he is hopeful it will progress to the consultation stage.
The document says it is “unfortunate when the underlying real estate, managers and investors are all UK-located – but the funds have to be operated outside the UK”.
“The PIF will also enable UK fund management houses to facilitate the UK government’s infrastructure revolution and goal to ‘level up’ the nation, as well as to respond to the opportunities presented by Brexit”
John Forbes, a real estate funds consultant, who has been arguing in favour of such a vehicle for several years, said: “It has always been an oddity that UK institutions investing in UK property have had to pool their investments through offshore vehicles due to the lack of a suitable onshore vehicle.
“Hopefully, this and other changes currently under consideration will allow this gap to be filled”.
Andrew Baum, professor of practice at Saïd Business School and chairman of Property Funds Research, said the time had come “to modernise, standardise and regulate a form of tax-transparent, closed-ended fund”.
He said identical “products are commonplace and established” in offshore jurisdictions. “It would be better to bring these onshore.”
Baum also said technical innovations had “made possible the development of highly efficient secondary markets” and a standardised closed-ended property fund would “quickly develop” its own secondary market.
“The world is awash with talk of tokenisation – in effect, informal, unregulated secondary markets for single assets and closed-ended funds,” he said. “It would be preferable by far to create a regulated framework for a superior and standardised form of such offerings.”
Rodrigues said the PIF would be applicable to assets classes other than real estate. “The PIF will also enable UK fund management houses to facilitate the UK government’s infrastructure revolution and goal to ‘level up’ the nation, as well as to respond to the opportunities presented by Brexit,” he said.
The IA is recommending the PIF as part of its Budget submission to the UK Treasury, which sets out a number of ways to “boost the competitiveness of the UK economy and global standing of the UK investment management industry”.
It is also recommending a series of measures that it argues “will ensure pension savings can be used to level up investment in infrastructure across the UK”.
The IA has also been pushing for the creation of a new Long-Term Asset Fund, an open-ended vehicle designed to help defined-contribution (DC) pension scheme invest in illiquid assets.
The LTAF is intended to address concerns around liquidity in open-ended funds, which was highlighted recently by the suspension of M&G Investments’ £2.5bn open-ended UK property fund, as well as the closure of the Woodford Equity Income Fund and a series of UK property fund suspensions in 2016.
The IA is arguing for flexibility around redemptions, allowing them “to be structured to reflect the time it takes to sell” assets.
Today, the association reiterated its call for the LTAF for “opening up investment opportunities to more pensioners, and a new source of long-term funding for infrastructure projects, such as hospitals, roads and new homes”.
Last week, the Financial Conduct Authority published feedback on its consultation on “patient capital and authorised funds”, directly addressing the IA’s LTAF proposals, stating that “More work is required before we consider consulting on changes to our rules”.
It said: “The proposal is unclear on which types of assets would be eligible for inclusion in an LTAF’s portfolio and what contractual commitments an LTAF could make… We will consider further as the IA continues its own work on the proposals.”