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UK property: Why funds are ditching the direct investing model

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One of the last UK funds that invests directly in property is ditching its investment model in favour of a hybrid plan.

The new mixed model will see the £112.6m TIME Commercial Long Income property fund holding a combination of assets directly with some real estate investment trust (REIT) shares.

90 per cent of the fund’s assets are currently directly invested in UK property, with most of its holdings let to commercial tenants as freehold assets with long leases.

Now, at least 45 per cent of its portfolio will be in REIT shares, while the fund will also seek to broaden its investment pool beyond the UK.

The move from the fund, which is one of only 12 left in the UK direct property sector, follows similar decisions from Legal & General and Abrdn’s property funds last year.

Additionally, in November, St James’s Place announced it would be winding down its three funds in the sector, citing lack of interest from investors and changing regulations for the sector.

The moves have highlighted the tough time that open-ended property funds have experienced since the coronavirus pandemic, with the funds struggling to operate with sufficient liquidity and a falling demand for office space.

Investors pulled almost £5bn from the funds in the three years up to the suspension of M&G’s giant £565bn Property Portfolio closure in 2023.

Oli Creasey, property analyst at Quilter Cheviot, stated that investor sentiment was “likely a factor” in TIME’s transition to a hybrid property fund as daily-dealt funds have fallen out of favour.

“Fund managers such as TIME are investing in REITs to retain property exposure while staying below the regulator’s proposed threshold for illiquid investments,” he added.

The Financial Conduct Authority has been consulting on a new set of rules over the last five years to address liquidity mismatch issues in property, suggesting a 90 to 180 day redemption notice period for the funds.

If at least 75 per cent of TIME shareholders approve the changes, they will be implemented from 1 April, with the transition process expected to take up to nine months.