The Association of Real Estate Funds. Survey of Independent Financial Advisors - Results. January 2015

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1 The Association of Real Estate Funds Survey of Independent Financial Advisors - Results January 2015

2 This research is funded and commissioned by The Association of Real Estate Funds (AREF) as part of our growing research activities, in support of one of our key objectives of influencing the evolution of the real estate funds industry. 2

3 AREF Survey of FAs The AREF Census is the largest regular survey of Financial Advisors, providing a unique insight into the attitudes and behaviours of intermediaries towards real estate investment; The results shown in this report are based on 227 advisors who generate 2 or more of their income from savings, investments or pensions; Fieldwork was undertaken between 13 th and 26 th January 2015; This research commenced in May 2008 and results have been tracked regularly; the comparisons referred to in this report relate to varying time periods. 3

4 Summary Over /me more advisers are beginning to recommend that more than 10% of a client s por?olio is allocated to property investment, whilst the average equity alloca/on has decreased to below 50% Minimum threshold rates of return required by clients above a risk free rate have increased for both commercial property and equity investments More advisers expect to use pension funds for collec/ve investments over the next 6 months, with a slight increase in Life Fund usage also 1 in 6 advisers do not use PAIFs because of limited access to the underlying fund; amongst those who do use them, two thirds say they some/mes have to place clients in the feeder fund when they would be bemer placed in the underlying fund More advisers expect a demand for property investment in the healthcare sector over the next six months making it now the second most an/cipated area of focus 4

5 Recommended % of portfolios allocated to property investments The proportion of advisers recommending more than 10% of a client s portfolio is allocated to property, is increasing over time, although the average proportion is unchanged since last wave 50% 40% 48% Mean Jan 15 8% Sep 14 8% May 14 7% Jan 14 7% 30% 20% 20% 21% 10% 0% 7% 4% 1% 1% None % % Jan 15 (227) Sep 14 (264) May 14 (229) Jan 14 (223) Base: All respondents (See chart) Q1. What percentage of a client's portfolio would you typically recommend being allocated to property investments (either directly invested in real estate or via an investment vehicle)? 5

6 Changes in recommendations to invest in property Fewer advisers say their recommendations to invest in property have decreased over the past 3 months Jan 15 (227) 27% 69% 2% 2% Sep 14 (264) 2 67% 4% 1% May 14 (229) 29% 6 3% 1% Jan 14 (223) 2 68% 3% 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Increased significantly Increased a little No change Decreased a little Decreased significantly Base: All respondents (See chart) Q2b. How have your recommendations to invest in property (directly or via an investment vehicle) changed over the past 3 months? 6

7 Client s level of property investment Since the recommended level of property investment has increased, more advisers say that clients have a lower level of property investment than they would recommend Jan 15 (227) 22% 40% 38% Sep 14 (264) 22% 38% 41% May 14 (229) 30% 28% 42% Jan 14 (223) 30% 33% 37% 0% 20% 40% 60% 80% 100% Clients have a greater level of investment in property than I would currently recommend Clients have a lower level of investment in property than I would currently recommend Don t know Base: All respondents (See chart) Q3. How does your current recommended level of investment in property (directly or via an investment vehicle) compare to your clients typical current level of holdings: 7

8 Expected average annual returns Expected returns on property investments are largely similar to last wave Total <0% Total >0% 5 Years (4%) 24% 44% 8% 11% 7% 9 (91%) 3 Years (3%) 30% 49% 11% 9 (97%) 1 Year (4%) 4% 51% 40% 93% (9) -40% -20% 0% 20% 40% 60% 80% 100% - to -1% -10% to -6% -1 to -11% -20% to -16% Less than -20% 1% to +6% to +10% +11% to % to +20% More than +20% Base: All respondents: Jan 15 (227), Sep 14 (264) (FIGURES IN BRACKETS = Sep 14) Q4. What are your expected average annual returns from property investments over each of the following periods? 8

9 Average expected annual returns from property investments The overall average expected returns from property investments remain at the increased levels first recorded in Sep 14 10% 9% 8% 7% 6% 4% 3% 2% 1% 0% 9% 9% 7% 7% 7% 7% 7% 6% 6% 4% 4% 3% 3% 1% May 13 (243) Sep 13 (245) Jan 14 (223) May 14 (229) Sep 14 (264) Jan 15 (227) Return from property investment in 1 year Return from property investment in 3 years Return from property investment in 5 years Base: All Respondents: (see chart) Chart shows average return Q4. What are your expected average annual returns from property investments over each of the following periods? 9

10 Minimum threshold rate of return for commercial property The minimum threshold rate of return that clients require from commercial property has increased slightly, with the average now closer to 4% Mean 3 Jan % 30% 2 20% 27% 26% 19% Sep May % Jan % 0% 1% 6% 1% >1% and 2% >2% and 3% >3% and 4% >4% and 6% >6% and 10% Sep 15 (227) Sep 14 (264) May 14 (229) Jan 14 (223) Sep 13 (245) 0% 7% > 10% None would invest in commercial property 9% Don't know Base: All Respondents: (See chart) Q6a. What minimum threshold rate of return would your clients require above a risk free rate from their commercial property investments? 10

11 Minimum threshold rate of return for equity investments For equity investments, the minimum threshold rate of return that clients require above a risk free rate has increased slightly Mean 40% 3 30% 2 20% 27% 3 19% Jan % Sep % May % Jan % 1 10% 0% 0% 7% 8% 3% 1% 1% >1% and 2% >2% and 3% >3% and 4% >4% and 6% >6% and 10% > 10% Don't know Jan 15 (227) Sep 14 (264) May 14 (229) Jan 14 (223) Base: All respondents: (See chart) Q6b. What minimum threshold rate of return would your clients require above a risk free rate from their equities investments? 11

12 Products likely to be used for collective investments More advisers expect to use pension funds for collective investments over the next 6 months, with a slight increase in Life Fund usage also UK Authorised UT/OEIC Property Funds 81% Pension Fund 68% Life Fund 54% Investment Trusts 21% REITs FCA Recognised offshore property funds Property Derivatives None of these 3% 4% 18% Jan 15 (227) Sep 14 (264) May 14 (229) Jan 14 (223) Other 3% Don't know 4% 0% 20% 40% 60% 80% 100% Base: All respondents: (See chart) 12 Q7. Which of the following are you likely to use for collective investments over the next 6 months? Please tick all that apply.

13 Use of PAIFs 1 in 6 advisers do not use PAIFs because of the limited access to the underlying fund; amongst those who do use them, two thirds say they some/mes have to place clients in the feeder fund when they would be bemer placed in the underlying fund % amongst those who do use PAIFs I am always able to place clients in the underlying fund where necessary 24% I sometimes have to place clients in the feeder fund when they would be better placed in the underlying fund 1 66% I only use PAIFs for clients who should be in the feeder fund (e.g. corporate clients) 2% 10% I do not use PAIFs because of the limited access to the underlying fund 17% I do not use PAIFs for other reasons 36% Don't know 26% 0% 10% 1 20% 2 30% 3 40% Base: All respondents Jan 2015 (227) NB: New ques/on added in Jan 2015 Q7a Property authorised investment funds (PAIFs) come in two parts; the underlying fund (which has the tax transparency) 13 and the feeder. (which does not). Some pla?orms do not allow you to put clients in the underlying fund, but in the feeder only. Which of the following best describes your use of PAIFs (Property authorised investment funds)?

14 Likely geographical areas for property investments Three quarters of advisers expect to recommend UK property investments in the next 6 months, with interest in several other loca/ons slightly decreased UK 75 % Global 35 % USA 13 % Asia 5 % Jan 14 (227) Europe None of these 4 % 11 % Sep 14 (264) May 14 (229) Jan 14 (223) Other 2 % Don't know 15 % 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % Base: All respondents: (See chart) Q8. Which geographical areas are you likely to recommend for property investments over the next 6 months? Please tick all that apply. 14

15 Anticipated demand for sectors over next six months More advisers expect a demand for property investment in the healthcare sector over the next six months making it the second most anticipated area of focus, just behind office property investment Offices 18 % Residential Healthcare Retail 12 % 13 % 17 % Jan 15 (227) Sep 14 (264) May 14 (229) Jan 14 (223) Prisons 2 % Industrial / Warehouse 15 % Hotels 4 % Pubs 1 % None of these 22 % 0 % 5 % 10 % 15 % 20 % 25 % 30 % Base: All respondents: (See chart) Q9. Do you anticipate a demand for any of the following sector specific property investments over the next 6 months? Please tick all that apply. 15

16 Importance of features of property investments A regular, stable income flow is now considered slightly more important in a property investment than diversification from bonds and equities Mean ranking (lowest score = highest ranking) Jan 15 Sep 14 May 14 Jan 14 Regular, stable income flow 33% 2 20% 8% 6% 6% Diversification from bonds and equities 33% 19% 22% 13% 6% 7% 1% Capital growth 18% 21% 18% 23% 9% 10% Low long term volatility 8% 19% 19% 21% 20% 7% Tax efficiency 8% 7% 11% 27% 31% 14% Inflation hedging 4% 10% 17% 23% 26% 20% Liquidity 6% 7% 8% 14% 56% % 20% 40% 60% 80% 100% 1st 2nd 3rd 4th 5th 6th 7th Base: All Respondents: Jan 15 (227), Sep 14 (264), May 14 (229), Jan 14 (223) Q10. Please rank the following features of property investments in terms of importance to you (1 = most important, 7 = least important). Please use each ranking only once. 16

17 Vehicles fit with property investment requirements Bricks & mortar funds (UK and global) remain the vehicles rated highest for providing the best fit for advisors property investment needs Mean ranking (highest score = best fit) Jan 15 Sep 14 May 14 Jan 14 Bricks & mortar funds investing in the UK 31 % 32 % 21 % 7 % 10 % Bricks & mortar funds investing globally 15 % 30 % 28 % 14 % 14 % Property security (or REIT) funds investing in the UK 14 % 27 % 30 % 14 % 15 % Property security (or REIT) investing globally 8 % 22 % 31 % 20 % 19 % Direct investment in UK REITs or Property company shares 9 % 23 % 27 % 17 % 24 % Direct investment in commercial property 8 % 13 % 20 % 19 % 39 % Direct investment into residential property 11 % 11 % 19 % 12 % 47 % % 20% 40% 60% 80% 100% Very good fit (5) Good fit (4) Average fit (3) Poor fit (2) Very poor fit (1) Base: All Respondents: Jan 15 (227), Sep 14 (264), May 14 (229), Jan 14 (223) Q11. Please rate each of the following vehicles for their fit with your property investment requirements. 17

18 Clients raising socially responsible or ethical investments The majority of advisors have some clients who raise socially responsible or ethical investment issues, although the proportion remains low 70% 60% 50% 40% 30% 20% 36 % 57 % Mean Jan 15 Sep 14 May 14 Jan 14 6% 10% 0% None 1% - 9% 10% - 2 Over 2 5 % 2 % Jan 15 (227) Sep 14 (264) May 14 (229) Jan 14 (223) Base: All Respondents: (See chart) Q12. What percentage of your clients raise socially responsible investment or ethical investment issues with you? 18

19 All data is at January 2015, unless otherwise stated. The Association of Real Estate Funds 65 Kingsway London WC2B 6TD Tel: Website: 19