George Bernard Shaw once stated that “property is organised robbery”. To some, including Mr. Shaw, the term ‘property’ represents undeserving and wrongful rights over land and buildings – an altogether sinister aspect of capitalism. To others, it embodies aspiration and rightful ownership. Moral approbation aside, property has certainly stirred the emotions over the years.
To the likely disgust of Shaw would be the way property has become a financial commodity of sorts – investable and tradeable – with ownership often tucked away into the deep recesses of the largest financial institutions.
Safe as houses
In the UK pension fund arena, investment into alternative assets, of which real estate is one, has visibly increased over the past several years. This has been a natural reaction to the need for diversification as well as the hunt for returns that are uncorrelated with more traditional assets, like equities and bonds. Property assets also tend to be less volatile than stocks and normally offer a better yield. Generally speaking, it’s a more stable asset class. For these reasons, real estate assets have become an increasingly mainstream part of UK pension funds.
Conveying the real estate message
With real estate’s rise to greater prominence in pension fund portfolios has come the requirement for more ‘air time’. Previously, it was easy to ignore real estate assets in fund reports as just a small part of the whole, glossing over their existence in a line or two. However, that’s starting to change as property begins to comprise a larger chunk of investors’ portfolios.
So, what of the challenges for the fund manager or investment writer when turning his pen to the subject? And perhaps more crucially, what do investors want from a real estate review section? The short answer is: nothing too different from any other asset review. They want to be informed about the sector, understand how the holdings have performed and why, and see how the manager’s philosophy and process is translating into earnings.
So is writing about property so very different from describing other, more traditional parts of the market? The answer is both ‘no’ and ‘yes’.
No. Real estate assets are like any other type of investment. They are a means to an end, providing both income and the potential for capital gain. Whether the fund invests directly through physical property, or in property funds or real estate securities, the dynamics and aims are largely the same. The fund manager is investing with the expectation of a return over the long term.
Yes. Writing about property does require some specialist knowledge and understanding. Not least, there are often specialist terms to mention and explain – REITs and cap rates, for instance. It can also be challenging to explain exactly what the fund is investing in, where the assets are and what they comprise, as often there is limited information on this. (More on this later.)
Tackling the information deficit
General unfamiliarity with the sector is an issue. Most investors, and indeed writers, are not as familiar with the workings of the sector as they are with equities and bonds. One of the problems when writing on, or reading about, real estate is that there is an unbridgeable ‘information deficit’. The issue here seems to be both a lack of information and a lack of real understanding of the mechanics of the property asset class. Typically, property investment reports might refer to the ‘industrial complex in x-shire’ or the ‘leisure-based asset in y-town’. Indeed, a well-known large UK investor, in a recent monthly fund commentary for one of its property funds, referred to a “rent review on a high-street retail store in Manchester”. This paints a picture, of course, but a very incomplete one. What is this retail store exactly?
One can argue that the investor doesn’t really need to know. The more important thing is simply that there has been a rent review, and that if it’s being mentioned, it’s presumably yielded a positive result for the asset. To a certain extent, the investor/reader has to accept that this is a specialist area, with only the fund manager knowing the full ‘ins and outs’ of the assets within the fund. This is a point of difference with equities and bonds, where investors may have some familiarity with the stock or can quite easily access information on it via a quick Google. This is often not the case with property assets – it is not always clear what the asset is or how much of the asset, for instance, is actually owned by the fund; and there is normally only limited information on it that’s available to the public.
With all this in mind, here a few tips for writing on real estate, with the overriding suggestion that the task of any writer is to convey a message as clearly and effectively as possible.
Tips for investment writers:
- Be eloquent and insightful in your commentary, and avoid jargon. This is a worthy and interesting segment of the market.
- If using jargon or technical terms, do not be afraid of giving short, succinct descriptions. For example, REITs (real estate investment trusts) are listed vehicles that are tradeable on an exchange, and that own and operate income-bearing properties. Cap rates (or capitalisation rates), refer to the net operating income generated from a property asset expressed as a percentage of its market value. They are a proxy for yield.
- Context and the description of assets is always important, as they deepen the reader’s understanding. It’s helpful and enlightening to mention that XYZ Fund’s REIT holdings are, for example, predominantly shopping centres in Manchester or Birmingham. Some fund reports are good at doing this, but not all. Pictures, where possible, can make things even clearer.
- If describing performance, delve down into its components – how much is from capital appreciation, how much from income from rent? Given income is normally a high proportion of the return of a property asset, investors will likely want to know. Many property fund reports do not bother with this.
- Provide more information on liquidity. While the investor should recognise that most property assets are long-term considerations, it is important for the investor to feel relaxed about the underlying liquidity of the fund’s assets; he or she should feel confident that they can easily trade in and out of the fund. The Financial Conduct Authority published a set of guidelines in February 2016 regarding liquidity of property funds, one of which covered disclosure and stated that “clear and full disclosure to fund investors on liquidity risks and the tools being utilised to manage those risks” should be available. This disclosure should be clearly communicated and not hidden in the small print.
- George Bernard Shaw may have hated to see it happen, but property has become a common and popular financial asset – one that’s likely to increase in importance given its obvious attractions. And writing about it doesn’t have to be the hospital pass it may have once been considered. Property can find its voice.
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