26 May 20
26 May 20
Having recently celebrated more than 30 years working with property professionals Afshin Taraz, founder and Chairman of Thompson Taraz, shares some of his thoughts and insights working in the property and fund sectors.
Read his full interview below:
We had a client with the idea of bringing together investors into an investment. Before that we’d had very little experience of funds, but once we had that first opportunity we jumped in with both feet at the deep end. That was over 20 years ago, and we learned exactly what was involved in providing fund services with the aim of doing it better than others.
Property all over the world and in every region and every country has always occupied a special position, which is half-way between investing in shares and investing in cash deposits. It’s a halfway house. It’s not as liquid as cash and not as volatile as shares, so it suits particular types of investors that are interested in a tangible asset.
Yes, there has been enormous change in funds. The funds arena splits into two; the larger authorised funds offered to retail investors. This is an enormous area. The other side are the private funds offered to professional investors and high net wealth individuals, as well as smaller equity investors who want to go into a syndicated arrangement. So, there has been significant change over the years in both sectors. The big change in private investment has been the degree of regulation and professionalism brought in to protect the investors’ interests and assets which has suited us because this has always been central to our purpose.
The main lessons are that it is very easy to get one thing wrong and then trip over on something else. For example, you get the accounts right but then you trip over the tax. You get the accounts right and the tax right and but you trip over some aspect to do with the regulation - so it’s a multi-faceted complex area in terms of the underlying property. It’s also multi-faceted and complex at the level of the fund, so it’s very important to have a strong team that covers all of those different aspects.
For larger, established property fund managers our main regulated service offerings are depositary and custody. Our deep understanding of funds, how they run and how managers conduct their business, enable us to proactively deliver improved security, visibility and control of assets.
For managers with a smaller organisation and more limited internal resources, our regulated offerings are AIF Manager or Operator services. These we initially tailor to complement their own experience and resource levels. Then over time we can support their growth objectives through proactive advice and support. To this group we seek to bring capacity, knowledge and skills, over the whole lifecycle of their funds’ investment activity.
Finally, sometimes property professionals outside the funds space come across investment opportunities that need more equity than they can deploy themselves and we can help them to explore whether a fund structure would help in drawing in the additional equity, and then support them in launching a first investment fund.
Our competitors are two types, the first type are larger, so can be inflexible and overpriced for what they offer, and the suitability of the teams that are engaged is subject to uncertainties of personnel changes and so on. The second type of competitor is much smaller, so doesn’t have the depth or breath of experience that we have. We meet the needs of funds managers who want a high degree of confidence that their funds are being looked after well but also value flexibility and responsiveness from their partners.
We learned that the level of gearing that funds had during that time was too high. It allowed the banks to take control either of the asset, removing the asset from the ownership of the investors, or demanding an early repayment option which was completely unrealistic. What we learned was that gauging the level of debt for a property is a highly sensitive issue. At the time before the 2008 crash the mindset of all fund providers was to maximise the borrowing because the banks were offering easy terms. They wanted to max out, but actually many of them would have been better off taking a lower debt.
We are following all the government guidance. Everything we have done we’ve tried to do within the framework of guidance and regulation and from a team perspective, we don’t want to put individuals at risk so everyone has been working at home and fortunately, we have a great IT platform which has enabled remote working, so we’ve maintained ‘business as usual’ throughout.
The biggest challenge that the property market is facing at the moment is related to valuation. This is because there are no longer any purchase and sale transactions taking place, and that means there is no certainty on what particular types of property are worth, and so for as long as the lockdown is in place there will be very few and insufficient transactions, with the consequences that whatever value properties had before Covid-19 will now be suspect. But nobody knows for good or for bad. We do know that for certain properties there will be surplus requirement at least in the short term, possibly offices because people are more able to work remotely but other types of properties such as logistics, warehouses and delivery points within cities will be much sought after, so there will be a market adjustment to reflect the change in supply and demand. Too much of one and not enough of the other.
The property fund managers need to identify extremely good purchase opportunities, in effect forced seller pricing, in order to have a chance of staying the course in terms of an eventual pick-up in the market. So it’s the usual thing - the low point in terms of market demand is the high point in terms of picking up valuable assets at deep discount prices. For the investors who provide the equity, this is potentially a fantastic time to be able to invest but it’s not a good time for people who don’t know or understand the property fundamentals. This is a time for professional property investors, because they will able to judge for themselves whether it’s the right opportunity at the right time.
The large authorised funds will find it challenging over a long period of time under the FCA regulations and the market’s liquidity demands. There are issues related to offering daily pricing for units for those funds, where the managers can’t sell the properties on a daily basis, which means that they shut the door. For private funds it’s quite a different situation because they tend to be more stable if there are no artificial pressures on exiting and the debt level is right. If I use the analogy of a residential property: you never want to be a forced seller, so you can always sell but at a time of your own choosing rather than because you have to. So inherently it’s not a risky proposition and the risk only arises if you have too much borrowing or you have deadlines for a sale imposed by third party lenders or investors. As long as investors are investing for the long term, there’s great potential.
Nothing has changed for me. It has the same quality as it had at the start, which is a blend of anxiety and excitement. Anxiety about the unknown, and excitement about the opportunities!