UK Commercial Property funds - impact on choice of which platform provider to use

tg99

Not sure if been mentioned before but if you are comparing costs of platforms then an additional thing to factor in is whether you intend to hold UK commercial property funds within ISA/SIPP.

A lot of these funds have now converted to a new structure called a Property Authorised Investment Fund (PAIF) which allows tax exempt investors to receive distributions gross rather than net of tax. This essentially means that if the fund is yielding 5% gross then investors in the PAIF will also get 5% whereas under the old structure rental income was taxed within the fund itself at 20% and could not be claimed back so you would only get 4% yield.

Unfortunately a lot of platforms do not currently offer the PAIF version and instead only offer a 'Feeder' version which suffers the 20% tax and so would only yield 4%. One reason for this is the additional complexity of administering the new PAIF structure.

Hence if you intend to hold say 10% of your isa / sipp in this asset class then the overall cost saving across your whole pot would be close to 0.1% pa if investing with a platform that offers PAIFs versus one that does not.

Of course, some of these platforms that do not offer PAIFs will likely do so at some stage so would be worth finding out their expected timing if this is the case.

bowlhead99

Good point, I was looking at this over the last couple of days trying to help someone allocate their ISA. If you were looking for L&G's UK property fund for example, at Youinvest or H-L you can buy the normal fund or the Feeder. But at Charles Stanley Direct or TD Direct they only list the Feeder.

The platforms don't make it easy for you either. At HL, the version I'd want to buy of the above is called Legal & General UK Property Trust PAIF (Class I Accumulation).

At Youinvest, and on the official factsheet, it's called Legal & General UK Property Fund (I Accumulation).

In one sense HL are making it obvious by saying it's the PAIF so you don't confuse it with Feeder (which has Feeder in the name on both platforms). If you search the word "PAIF" at Youinvest, you get zero hits. Thumbs up to HL. But HL are also saying "Trust" when it isn't an investment trust or a unit trust, it's an OEIC, and the factsheet doesn't call it a trust. Only by looking at the ISIN or SEDOL can you see it's definitely the exact same instrument.

As an aside, Youinvest's Morningstar Quickrank listing shows that the Feeder versions of L&G, Kames, M&G are available for monthly regular investment while the "main fund" versions aren't. AIthough neither of the versions of the Ignis equivalent have the regular investing flag. But over at HL they list Ignis's PAIF as being available on a regular plan from only £25 a month.

I'm sure there are plenty of blissfully ignorant people who have no idea of the merits of feeders vs paifs, bundled vs unbundled, direct property holdings versus holdings of property securities and so on -they simply heard on the grapevine that they ought to use property as a diversifier. But for those of us who do (think we) know roughly what we're looking for, it's still way more painful than it should be, so God help the rest of them!

Basically the old adage of build a portfolio and then find somewhere cheap to hold it, should ideally hold true when you're shopping around for a platform. But with platforms having different offerings, sometimes in practice you just have to find alternatives and replacements and force them to fit within the parameters of your main platform of choice.

Not ideal, but if you do as the OP and treat your extra management fees, tax, or "missed performance" as a platform cost, there are definitely some reasons why you might change your assessment of your platform, compared to what you thought you were getting into.

masonic

I've tended to be steered towards closed-ended vehicles for property exposure. Having read this thread I'm glad I did as navigating these issues does not look like fun.

AlanP_2

So what is the difference between a Feeder fund and a PAIF apart from the tax issue?

I've seen "feeder" in various property fund names and often wondered what it meant.

bowlhead99

masonic wrote: »

I've tended to be steered towards closed-ended vehicles for property exposure. Having read this thread I'm glad I did as navigating these issues does not look like fun.

Closed ended makes perfect sense for real estate IMHO. If the aforementioned "award winning" L&G fund suffers a lot of redemptions in a downturn and needs cash to meet those redemptions, and has used up its cash float, what is it going to do? Try to sell off a few square feet of its building at No xx, The Strand? Freeze redemptions? Neither seem ideal.

By contrast if it's a closed vehicle, anyone who wants to leave just has to find a willing market participant to buy their shares - they might have to take a bit (or a lot) of a haircut on the share price, but they won't do anything to thwart the manager's own objectives. Unless those objectives involve raising new finance at a good share price to add to the portfolio of course.

So, closed ended funds are a good match for illiquid assets.

Open ended funds can be a good match for liquid assets like shares in other closed ended property companies or REITs - an open ended fund easily deploy new subscriptions or meet redemptions, if it has suitably liquid holdings. But obviously an open ended fund that's holding other property companies with their own premiums, discounts and liquidity profiles, whose values are changing daily on the stock markets, can be a different level of risk and volatility from something "simple" that just buys and holds direct properties. A "property securities tracker" is a very different beast to a pure holding of commercial property with as few middlemen as possible.

And if you just buy a closed ended REIT which itself holds direct properties you might think you are on to a winner for the common-sense reasons above, but do need to understand the full effects of gearing, discounts vs premiums and so on. I think that's why less experienced investors would generally be steered towards open ended direct funds - understandability rather than absolute efficiency.

Still, it's all good fun, trying to slap a portfolio together and then justify to yourself why you did it. Can't say I really envy the IFAs who have to be able to explain to others why they just did what they did - often much easier to get yourself comfortable with an idea than it is to get someone else comfortable with the same idea!

tg99

Essentially the Feeder fund is an authorised unit trust that invests in the PAIF and is designed for investors who are holding it outside of tax wrappers, those that cannot administer the PAIF (such as some platforms as noted above) and corporates who would otherwise hold more than 8% of the PAIF which is not allowed.

Agree on illiquid assets being well suited to closed ended vehicles eg property, private equity etc. But at present a fair few of the decent managers are on premiums to NAV. And in market sell offs the closed ended vehicles will likely decrease more sharply / quickly in price than their open ended counterparts. That said, as noted above there is the risk with open ended that the manager freezes redemptions as happened with some managers in 2008. Plus a potential price hit of 5% if a single priced fund goes from having net inflows to outflows, ie swings from an offer to a bid basis in price. So there are pros and cons I guess and so to try and guard against this in terms of timing my exit from open ended I'm watching a variety of indicators in terms of returns and flows to try and identify as early as possible that the strong recovery in returns and flows into the asset class over the last couple of years is starting to slow. And also spreading my investment across a few different funds; and diversifying somewhat by gaining my European property exposure via an ETF (ishares European Property Yield which I believe should be a notable beneficiary of ECB qe especially given where bond yields are at present).