LPP pools £1.2bn of property amid investor fears over asset class

Falling valuations of commercial property may even provide investment opportunities, particularly for funds with the scale required to acquire direct holdings, it was suggested.

The new LPP pool, announced this week, will oversee the two funds’ core property allocations, £850m of which is managed by Knight Frank Investment Managers.

The pool also includes a £260m mandate for specialist income and value-add strategies, including residential developments and student and retirement housing provision.

The schemes’ continued commitment to property stands in stark contrast to that of retail investors. Seven property funds were forced to halt redemptions over liquidity fears in the aftermath of the UK’s Brexit vote.

I don’t think anyone knows at the moment what their properties are worth, which is an issue

Matthew Abbott, Mercer

Aberdeen Asset Management has since lifted its suspension, allowing investors to redeem their investments at a diluted price, while Henderson Global Investors announced plans to sell one of its prime assets in order to provide liquidity.

But Trevor Castledine, the LPP's deputy chief investment officer and head of credit investment, said any drops in property valuations as a result of forced sales would not worry long-term investors like the LPFA and LCPF, as their primary focus remains yield.

“We aren’t so fussed about valuations because we aren’t really looking to churn our portfolio very much,” he said. “We are aware that there are some risks to the property sector but they’re more associated with the long-term growth of the UK economy.”

He said the size of the investment pool means it can afford to hold property directly, and thus would not be affected by haircuts applied to some property funds.

Potential opportunity

Nick Duff, co-head of Aon Hewitt’s real estate team, welcomed the gatings and diluted prices as a means of protecting long-term investors in the property market from those who “try and play the market”.

Haircuts have also been applied in some property funds available to institutional investors. According to Duff, this could be seen as an opportunity for well-placed schemes.

“I think we could see some clients possibly enter funds where they see value,” he said.

Castledine said the LPP would stick to its existing investment strategy, but would consider buying significantly undervalued assets.

David Will, senior consultant at JLT Employee Benefits, said other schemes had already benefited from current market conditions.

“I know of a situation where changes to asset allocation that were due to be made anyway were completed, [which] involved an additional exposure to property as a long-term holding, without suffering the usual dealing costs simply because the price of the fund in question had swung from a higher offer price to a lower bid price,” he said.

A long-awaited downturn

Investment in property has offered potentially attractive returns in recent years alongside portfolio diversification, according to Matthew Abbott, principal in Mercer’s real estate boutique.

He said falling valuations would be expected to damage returns this year as part of a normal cycle within the sector.

“Returns have been fantastic for the last three years and some sort of cooling was to be expected regardless of Brexit,” he said.

Abbot added that a weakening outlook in the tenancy market and difficulties in obtaining accurate valuations presented risks in the aftermath of the referendum.

“There’s obviously a lot of uncertainty with what’s happened, and I don’t think anyone knows at the moment what their properties are worth, which is an issue,” he said.