Expert Corporate Finance
PAIF INDEX 2016 Q3
Property Authorised Investment Fund Index
Quarterly PAIF Index
[email protected]
PAIF INDEX 2016 Q3 | NORTH STAR CORPORATE FINANCE
What is a PAIF?
A Property Authorised Investment
Fund (“PAIF”) is a UK FCA
authorised and regulated open-ended
investment company intended to offer
tax efficient pooling for investment
into UK real estate assets. Since being
introduced in April 2008, applications
to elect as a PAIF have accelerated and
there are currently 17 PAIFs
authorised in the UK. Assets under
Management for UK PAIFs currently
total in excess of £15 billion as at 30
September 2016.
PAIFs are generally tax exempt
investment vehicles for real estate and
generally do not suffer any tax on
gains or income. Tax exempt investors
receive gross distributions and nonexempts are subject to withholding
tax.
About the PAIF Index
The NSCF PAIF Index provides an
integral benchmark of relative
performance of a core basket of
Property Authorised Investment Fund
(“PAIFs”), representing a proxy for the
performance of the authorised UK
commercial property funds market.
The PAIF Index is also assessed
against a benchmark of a basket of
UK REITS, useful in presenting the
clear differentials in valuation
approaches and volatility between the
open-ended funds market and closed
ended listed market. In total, the PAIF
Index currently includes 12 PAIFs and
the relative REIT Index tracks 30 UK
REITs. The PAIF Index is backdated
to April 2013 = 100.
NSCF PAIF INDEX | 2016 Q3
North Star Corporate Finance is delighted to issue its maiden quarterly PAIF Index publication, for the period
of Q3 2016.
Q3 2016 was a particularly fascinating period in the immediate aftermath of the EU referendum result, with
widespread market turbulence in the UK commercial property market. The turbulence led to the dealing
suspension of a swathe of PAIFs, including those of Henderson, M&G, Standard Life and Threadneedle and
the widespread use of fair value adjustments, as permitted under the terms of the FCA Handbook. This
included a 17% discount adjustment to the valuation of the assets of the Aberdeen UK Property Fund (PAIF).
The unique period saw the FCA scrambling to respond to the market turmoil with short notice guidance
published to provide AIFMs updated guidance on fund suspensions and to commence a wider review of openended funds that invest in illiquid assets.
The year-on-year change (Q3 2015 vs Q3 2016) for the benchmark REIT index changed -10.2% and -4.0% for
the PAIF Index for the period. By the end of the period there was evidence of stabilisation and recovery with the
absolute PAIF Index increasing by 1.74% over the relevant quarter. The corresponding movement in the REIT
benchmark over the period was 4.7%.
150
PAIF INDEX | Apr 2013 – Sep 2016
140
130
120
110
100
90
PAIF Index
REIT benchmark
80
Q3 2013
Q3 2014
Q3 2015
Q3 2016
AuM (NO.
OF PAIFS
INCLUDE
D)
£5.5 bn (8)
£7.3 bn (10)
£9.4 bn (10)
£14.9 bn (12)
PAIF Index
YEAR ON
YEAR
N/A
10.1%
13.3%
-4.0%
About North Star
PAIF
INDEX
(Q3)
101.7
112.0
126.8
121.8
North Star Corporate Finance offers
technical corporate finance expertise
with overall delivery to funds and
corporates in the UK and Europe.
REIT –
YEAR ON
YEAR
N/A
16.3%
21.0%
-10.2%
REIT
INDEX
(Q3)
101.9
118.5
143.3
128.7
IPD INDEX
(1-3 years)*
12.2%
8.9%
3.3%
-1.0%**
Our expertise includes structuring and
restructuring funds into PAIFs, both
onshore and cross-border. For more
information about North Star
Corporate Finance and how we can
assist, please contact us.
SHARPE RATIOS – 3 YEARS
PAIF (1)
1.9
(1)
1.5
REIT
IPD INDEX (1) (2)
1.4
*Extracted from MSCI IPD UK Monthly Property
Index (September 2016)
**Last 6 months performance
(1) Based on ICE LIBOR (risk-free rate)
(2) 3-Year Annualised value
PAIF INDEX 2016 Q3 | NORTH STAR CORPORATE FINANCE
SETTING THE AGENDA:
BREXIT AND PAIF AND ACS SEEDING RELIEF
EU REFERENDUM
The EU referendum outcome (‘Brexit’) resulted
in an immediate temporary shock to the UK
economy and notably the UK real estate market
in both the commercial and residential sectors.
The share prices of UK REITs and listed
property trusts dived to reflect expectations of
future falls in commercial property values albeit
have since partially recovered. The turbulence
led to the dealing suspension of a swathe of
PAIFs, including those of Henderson, M&G,
Standard Life and Threadneedle and the
widespread use of fair value adjustments, as
permitted under the terms of the FCA
Handbook. This included a 17% discount
adjustment to the valuation of the assets of the
Aberdeen UK Property Fund (PAIF).
In the short to medium term, there is likely to
be a period of uncertainty as the UK seeks to
negotiate its exit from the EU (this means that
UK fund regulation and law may diverge from
those in the European Union). It is likely that
real estate investments in the UK may be
subjected to greater price volatility and be more
difficult to value. Any divergence between UK
and EU fund regulation may exacerbate this
uncertainty.
FUND SUSPENSIONS – FCA GUIDANCE
Following the EU referendum, the FCA rapidly
published guidance around fund suspensions,
reminding fund managers to ensure that assets
are valued fairly and accurately and to ensure
that any subscriptions or redemptions of units
take place at a fair price.
It went further and suggested that should a
fund manager need to dispose of underlying
assets in order to meet an unusually high
volume of redemption requests, the manager
must ensure these disposals are carried out in a
way that does not disadvantage investors who
remain in the fund or are newly investing in it
and should actively consider suspension. This
partially explains the relatively high propensity
of suspensions of daily dealing PAIFs.
The FCA specifically gave guidance to
commercial property funds who chose to
suspend that when the suspension was limited
they should consider:
- the redemption price and the opportunity to
cancel are clearly communicated to investors;
- this communication explains the options that
are available to investors and includes details of
how to cancel the redemption requests; and
- investors are given sufficient time to make
their decision and to seek appropriate advice.
This timeframe should take into account the
types of investor in the fund and whether
communications to these investors need to take
place through an intermediary.
PAIF AND ACS SEEDING RELIEF
On 15 September 2016, the Finance Act 2016
received Royal Assent. This Act included major
changes to the application of Stamp Duty Land
Tax (SDLT) relating to PAIFs and CoACSs,
known as “seeding relief”. The relief allows
PAIFs and CoACSs to be seeded, subject to
criteria, without the incidence of SDLT;
CoACSs will also become opaque for SDLT
purposes.
What is a ‘Fair Value
Adjustment’?
The FCA regulations provide that where
the authorised fund manager, the
depositary or the standing independent
valuer have reasonable grounds to
believe that the most recent valuation of
a real estate asset does not reflect the
current value of that asset, the fund
manager should consult and agree with
the standing independent valuer a fair
and reasonable value for the asset, which
is then reflected in the unit pricing of the
fund.
Fair Value Adjustment (FVA) allows
PAIFs to adjust the value of the fund’s
underlying property assets. Some factors
that might impact FVA are level of
redemption requests, market conditions,
downward pressure on property values,
opinion of independent valuers and
occurrence of exceptional market
conditions.
The relief will have a significant impact on the
industry, now opening up the possibility of
efficiently transitioning any portfolio of UK
property to seed a new fund (PAIF or ACS)
without SDLT liability (this excludes Scotland).
These changes combined open up the
possibility of an entirely new combination of
structures for different profiles of investors –
both domestic and offshore.
The FCA Handbook rules for authorised
funds regarding FVA is set out in COLL
6.3.6R.
North Star believes this is a major development
in the sector with significant opportunities for
the creation of new funds.
| ARC Time Funds: FIAF
NEW PAIF – FIDELITY UK REAL ESTATE
FUND
North Star advised as lead adviser and project
co-ordinator
on
the
market-leading
transformational restructuring of Fidelity’s UK
real estate fund (with AuM of c.£450 million),
re-domiciling the fund from Luxembourg to the
UK, with tax election as a PAIF named as
Fidelity Real Estate Fund. This was the first
cross-border conversion to a PAIF.
The new PAIF is structured as a Qualified
Investor Scheme with a balanced UK
commercial real estate portfolio.
North Star believes this is the commencement
of a wider trend of on-shoring of UK property
funds reflecting increasing legal, tax,
commercial and political headwinds by
domiciling the structures offshore.
PAIF INDEX:
Current universe
| AEW Core Property Fund
| ARC Time Funds: CFF
| Host Capital UK Student
Accommodation Fund
| Henderson UK Property PAIF
| Kames Capital Property Income Fund
| M&G Property Portfolio
| Royal London Property Fund
| Schroder UK Real Estate Fund
| Standard Life UK Real Estate Fund
| Threadsneedle UK PAIF
| TM Hearthshone UK Residential
Property Fund
PAIF INDEX 2016 Q3 | NORTH STAR CORPORATE FINANCE
ABOUT NORTH STAR CORPORATE FINANCE
North Star offers technical corporate finance expertise with overall project delivery to funds and corporates in the UK and
Europe. Our expertise includes structuring and restructuring funds into PAIFs both onshore and cross-border.
VALUE
North Star provide significant value to clients at all stages of transaction. Intelligent solutions, streamlined resources and
deep experience of negotiating terms and transacting projects together with operational implementation allow transaction
costs to be appropriately minimised.
RISK MANAGEMENT
Through experience North Star know where vital client protections and key terms should be included. Corporate finance is a
dynamic discipline and our breadth of experience can ensure we know the facts as market practice, tax, regulations and legislation
evolves and ensure our clients achieve optimal outcomes.
‘BEST IN CLASS’
Our strengths include niche experience of structuring and restructuring property and real asset backed funds, including cross-border.
We have market-leading experience in authorised funds (including PAIFs), REITs and private equity funds in the UK and Europe.
PROJECT MANAGEMENT
North Star has unique and deep experience of conceiving and transacting complex corporate finance projects, coordinated delivery
across all aspects of commercial, financial, tax, legal, regulatory and operational work packages.
Quarterly PAIF Index
CONTACT
+44 (0)20 3865 0532
The Stanley Building | 7 St Pancras Square | London | N1C 4AG
[email protected] | www.northstarcorporatefinance.co.uk
Andrew Månsson-Lowe | Managing Director | [email protected]
Adam Romoff | Associate | [email protected]
Rami Al-Bazergan | Analyst | [email protected]
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The
publication is not and should not be construed as advice or relied upon. North Star Corporate Finance, its shareholders, employees and agents
do not accept or assume any liability or duty of care for any loss (direct or indirect, however arising) arising from any action taken or not taken by
anyone in reliance on the information in this publication or for any decision based on it.
North Star Corporate Finance is the author, creator and owner of content of this publication and is also the exclusive property owner of the
terms “PAIF Index” and derivations of this.
North Star Corporate Finance is the trading name of Ursa Minor Limited, an English private limited company. © 2016 Ursa Minor Limited.
All rights reserved
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