Section One: Fund Universe

Section One: Fund UniverseTo make an allocation to a market, investors need to be sure that it is of sufficient size and that there is an adequate selection of funds to choose from. The greater the size and range of funds available, the more investors will be attracted to the asset class and the larger and more liquid the market is likely to be.Size of the market
The IPF Report into the Size and Structure of the UK Property Market² estimated that at the end of 2018 the commercial investment stock was £512bn. The report estimated that UK and overseas investments into unlisted and collective schemes accounted for £132bn, or 26%, of this stock, ahead of the listed sector, which accounted for 17%, and just below direct owners with 29% of the market.At the end of 2018 the PFV Handbook comprised property to the value of £69.1bn, 13.5% of the commercial investment stock. This figure is an increase on the 9.0% allocation as at the end of 2009.
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²The Size and Structure of the UK Property Market – Year End 2018 Update, IPFFigure 1.1, Growth in the AREF Sample

^{Source: MSCI/AREF PFV Handbook, IPF Size and Structure of the UK Property Market}

Fund Aggregations in the Index
Investors formulate their strategies partly using data on the performance and risk characteristics of different asset classes. The Index documents the performance track record of unlisted real estate funds using recognised measurement standards.Sub-groups of funds divide the market into different categories, or aggregations, that can be more appropriate comparators for individual funds. The investor base, the fund type and whether the fund is open or closed ended, will also all have an influence on investment flows which will be one of the factors explored in section four as a driver of fund performance.Funds can also be distinguished by fund strategy or style. Currently this is the case for Long Income funds and the separation of Low Geared from Balanced funds (all Balanced funds are currently categorised as Low Geared which illustrates the difficulty of segregating funds based on characteristics that change over time).Few funds that concentrate on development or major refurbishment work have joined the Index. The Index rules require quarterly valuations, which are not usually available for development schemes in progress. These funds are also unlikely to trade in the secondary market.Table 1.1, Breakdown of the PFV Handbook by aggregation, Q3 2020

Source: MSCI/AREF PFV HandbookSample of funds
Over the history of the PFV Handbook there have been 127 contributing funds, peaking in number at 91 during the GFC and by NAV at £72.1bn in Q3 2018.Figure 1.2, Growth in the sample

^{Source: MSCI/AREF PFV Handbook}The period prior to 2002 was dominated by Balanced funds, rising from 10, to 23 funds with an NAV of nearly £7bn, which accounted for 73% of the sample. Meanwhile, the number of Specialist funds rose from one, the Falcon Property Trust, in 1990, to 14. A further 24 Specialist funds were added before the GFC by which time the category accounted for 40% of the AREF Universe. This proved the high-water market for the relative and absolute importance of Specialist funds as their number halved by 2014 and slipped further to just 13 by q3 2020, although this still accounted for 13% of the NAV of the AREF Universe.The surviving Specialist funds are a mix of the larger retail property types, Central London office funds, the Airport Industrial PUT, the Industrial Property Investment Fund and three funds in the ‘other’ category. Relatively few funds that launched post the GFC have joined the PFV Handbook. The youngest specialist fund was launched in 2010.Table 1.2, Specialist property funds, Q3 2020, (NAV)

^{Source: MSCI/AREF PFV Handbook}The relative importance of the Long Income funds has risen relentlessly to make up 20% of the universe by q3 2020. Not only do Long Income funds focus on very long unexpired lease terms, but the income is also often linked to non-standard commercial property types and on non-traditional lease types such as ground rents and inflation-linked reviews. Despite this, the PFV Handbook contains no fields to distinguish between the focus of each Long Income fund.Figure 1.3, Growth in the PFV sample by Aggregation

^{Source: MSCI/AREF PFV Handbook}Despite the growth in the Index, according to data from Realfin, the total number of UK fund launches since the GFC has been nearly 300 with a relatively high proportion of new residential and debt funds.Table 1.3, New fund launches since 2008

^{Source: Realfin and Property Funds Research}Size of funds
Investors fundamentally require funds that can accommodate their investment needs as well as providing a choice of portfolio strategy. This requirement can either be for very large funds for the biggest investors, or for smaller funds that are open to more modest investor allocations. There are minimum investment rules in one-in-ten funds, in the AREF universe, that preclude an initial investment of below £50,000. Indeed one-in-six funds require investments of over £2m.The size of funds available to investors varies widely from less than £100m to the £4.4bn M&G Secure Property Income Fund. Specialist, Balanced and Long Income funds are available across all fund size brackets with the BlackRock UK Property Fund, Legal & General UK Property Trust and Legal & General Assurance (Pensions Management Limited) funds also in excess of £3bn.Figure 1.4, Range of fund NAV, Q3 2020

^{Source: MSCI/AREF PFV Handbook}Investors would seemingly have a choice of Balanced, Specialist and Long Income fund sizes, but even the largest funds look tiny compared to the massive pan European and US funds which can attract significant capital. For example, the Blackstone European Property Fund raised a staggering €9.8bn in April 2020, and the 24 largest US Open-end Diversified Core Equity (ODCE) funds have an average size of €10bn.Summary

At the end of 2018 the PFV Handbook comprised property to the value of £69.1bn, 13.5% of the commercial investment stock, an increase on the 9.0% as at the end of 2009.

Fund categories, or aggregations, are more appropriate comparators for individual funds. The two main aggregations are the predominantly open-ended Balanced funds and the predominantly closed-ended Specialist funds. There are two ‘style’ categories, Long-Income and Low Geared Balanced.

The success of some Specialist funds and the growth in Long Income funds has offset the lack of new funds joining the Index.

The UK real estate fund industry provides a range of fund types and sizes to accommodate many investors, but not the scale required for the very largest global investors.

Minimum investment rules set a relatively high hurdle for initial investment.

Section two analyses the performance of unlisted funds and the range of fund returns within them. Section three will examine the impact of the reported fund characteristics on fund performance.