Is property back on the agenda again?

In our opinion the commercial property market could well be poised for a period of growth.

“Giant pension fund piles into property as analysts say now is the time to snap up cheap exposure” is typical of recent headlines from the money and business pages of the national press. And they may have a point.  Property investors have seen their holdings fall on average 11.4% over the past five years (source Lipper), with some investors losing a quarter of their cash. This in turn is leading many to believe that the asset class is now undervalued and primed for recovery.

Why might your customers be interested?
For most people, the largest investment they make in the property market is in their own home. A fortunate few, branch out into ownership of rental properties, which has in many cases provided a healthy income stream and some potential for capital appreciation, but also brings with it landlord responsibilities and the anxiety of finding good quality tenants.  However, for those wishing to invest in property without the complications of buying and managing a rental property themselves, or wanting to diversify into non-residential buildings, property funds provide an alternative as they allow small investors to become part owners of many large properties.

With direct ‘bricks and mortar’ property funds, rental income can be relatively secure in comparison to other asset classes because of factors like long lease lengths (typically five years or more), less risk of default than residential properties and upward-only rent reviews, meaning that rental income often increases by at least inflation each year.  However a major downside of direct commercial property investment, is that property markets are highly illiquid compared to most other financial instruments such as equities or bonds, meaning that buying or selling a property can take a long time, and stressed conditions can make it difficult to sell a holding in the fund.  In addition the higher than average costs associated with buying property such as stamp duty, surveys and legal fees need to be paid and can affect the value of the fund, rental growth is not guaranteed and unpaid rent could affect the performance of the investment.

Alternatively indirect commercial property funds can buy shares in companies that invest in property and tend to be more liquid investments. The majority (over 80%) of these property companies are Real Estate Investment Trusts (REITs), and have greater tax benefits than other listed property companies. REIT companies don’t pay corporation tax on their assets, on the condition that 90% of profits are paid to shareholders as dividends.  REIT holders pay either 20% or 40% tax, on dividends because they’re classed as property-letting income.In contrast Property Investment Trusts, which pool money to buy property and property company shares are considered to be like any other company, so tax on dividends is only 10% for basic-rate payers and 32.5% for higher-rate payers.

Why now may be the time to invest?
Analysis of returns from 42 funds in the IMA Property Sector by shared equity mortgage provider Castle Trust showed the worst fund lost 26.6% over the period from mid-2007 to June 2009 and the Investment Property Databank Index lost 42% of its value. Since then there has been a gradual recovery but this has been below trend when compared to other asset classes.

Many analysts are commenting that these indicators show contrarian investors are poised to snap up property funds. Caisse, Canada’s largest pensions company, announced in January 2013 plans to buy C$10bn of global property over the next 18 months to boost returns.

UK commercial property prices fell in 2012. But Legal & General’s own property team believe that there are a number of drivers, particularly the attractive valuations available in the sector, that makes them more optimistic about returns in 2013 and beyond. They’ve taken the view that assets such as equities have already seen the benefits of loose monetary policy, and commercial property could be next, although conditions may remain challenging for certain sectors and asset types.

Standard Life recently commented that property could be the surprise profitable asset class of the next decade, predicting better returns from bricks and mortar than shares.  Rental yields currently sit at 6%, compared to the average FTSE 100 company which pays a dividend of 3.5% or 2% from a UK Government bond.

Cass Business School said Caisse’s plans to up property exposure were typical of pension funds looking for income in non-core assets such as property.  With its predictable long-term, and usually inflation-linked, income streams, and attractive premiums to compensate the investor for their illiquid nature, property assets currently offer more attractive yields than bonds of a similar risk profile. Indeed, in the final quarter of 2012, property proved to be three times more popular than infrastructure debt as the pension scheme de-risking asset of choice. With gilts unlikely to rise by any meaningful extent anytime soon, there is good reason to believe that non-core property investment will continue to strike a chord with those UK pension schemes who want to de-risk and more efficiently match their assets to their liabilities.

So  – is it time to take a look at your clients property investments again?
Of course, as always, all the usual warnings and caveats apply, but we strongly believe that property is worthy of further consideration, and could retake its place in portfolios as a diversified income generating mainstay for some of your clients.

John Hart,
External Funds Director,

Legal & General

Investment Management Research Unit (IMRU).

Contact us.
For further information please contact your Legal & General representative. Alternatively call 0370 050 0614*
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Stupid is as stupid does

So if the Daily Mail is to be believed, the banks are about to embark on another compensation round, this time in relation to card fraud protection insurance. Unfortunately, even with a new regulator in place, this trend of retro-identification of miss selling will continue, and for years to come.

Why is it that year after year after year we see regulation with the benefit of hindsight demonstrating that so many consumers have, or so it would seem, been ‘ripped off’ by miss-selling and maybe even miss-buying of financial services products?

Well, in my opinion, it is because the toxicity of miss selling, where it may exist within financial products and instruments, is not discovered and dealt with before release upon the ‘innocent consumer’ as there is no regulatory mechanism to do so.

If miss selling is seen in the same place as a crime in the eyes of the consumer and regulator, then we should be asking what preventative measures are and can be taken.

We do not expect to see drinks, drugs, cosmetics, food, cars and airplanes allowed to be let loose on the ‘unsuspecting’ public before they get a licence from an authorized accreditation body demonstrating they are fit for purpose. This often involves long trials and even longer signing off processes.

The resulting accreditation these products are given places much responsibility at the door of the organisation issuing the certificate confirming it is safe to ‘swallow’, ‘apply’, ‘wear’ ‘drive’ or ‘fly. And consumers expect nothing less.

AMI boss Robert Sinclair recently and very astutely observed that the “Civil Aviation Authority keeps planes, our skies and airports safe for £126m, the Food Standards Agency (yes that other FSA) only costs £110m, so what is it that makes our new FCA so expensive at £446m”?

And he has a very valid point. The aforementioned agencies test for ‘fit for purpose’ and take considerable responsibility for that. They also licence many who work with these products, drugs and services. And when accidents happen they investigate, determine the cause and ensure a repeat of it does not happen.

And in financial services? Er no!

So, perhaps with a new regulator, the focus of the industries money, all £446m this year, should be targeted on a strategy of using intelligence, experience and even common sense to ensure that the toxicity is detected and sterilised before the product is released.

That way the consumer can be comforted when seeing that a ‘fit for purpose kitemark’ stamped on the product they purchase confirms that a body, person or persons has tested it, said it is fit for purpose, specific purposes in fact and has taken responsibility for that affirmation.

So when Robert says that the CAA keeps our skies sake at a cost of £110m, can you imagine the aviation equivalent of financial services miss-selling? Only in this case death is the consumer outcome.

If a plane falls out of the sky, you do not see fines being levied on the manufacturer by the CAA, you see action to ensure that whatever was missed that caused the crash is engineered or trained out so that it does not happen again.

For many years, I and many other commentators have said that so much wasted cost and consumer detriment can be taken out by the regulator if foresight was used rather than hindsight. This principle operates in every other part of consumer life, why not in financial services too?

Only the most stupid person could possibly disagree surely?

A Panacea for Paraplanners

As we have settled into the new world, with greater regulation surrounding documentation and accountability, paraplanners have played an increasingly important part in supporting the service offered by advisers. In recognition of this, we are delighted to announce the launch of a dedicated microsite for paraplanners.

Designed in conjunction with providers, paraplanners and support services, the new Paraplanner microsite ensures existing planners, as well as those new to the industry have easy and fast access to the tools and information they need.

This new site offers a range of articles, services and tools designed specifically to assist with a paraplanner’s day-to-day role and includes technical information and learning materials to help with their professional development.

We are confident this site will be popular with our ever-expanding number of paraplanning users so please pass this on to your paraplanner colleagues as we believe that this, in turn, will provide further support to our adviser community.

For more information please visit

Adviser charging concerns, what if advisers sold paint

FCA chief executive Martin Wheatley says he is concerned that bias still exists under certain RDR adviser charging structures, particularly those based on a percentage of assets invested.

Just imagine how things would be if financial advisers sold paint.

Customer: Hi. How much is your paint?

Financial Adviser: Well, sir, that all depends on quite a lot of things.

Customer: Can you give me a guess? Is there an average price?

Financial Adviser: Our lowest price is £12 a litre and we have 60 different prices up to £200 a litre.

Customer: What’s the difference in the paint?

Financial Adviser: Oh, there isn’t really any difference; basically it’s all the same paint.

Customer: Well, then I’d like some of that £12 paint.

Financial Adviser: When do you intend to use the paint?

Customer: I want to paint tomorrow. It’s my day off.

Financial Adviser: Sir, the paint for tomorrow’s use is the £200 paint.

Customer: When would I have to paint to get the £12 paint deal?

Financial Adviser: You would have to start very late at night in 21 days, or about 3 weeks. But you will have to agree to start painting before Friday of that week and continue painting until at least Sunday.

Customer: You’ve got to be *&%^#@* joking!

Financial Adviser: I’ll check and see if we have any paint available.

Customer: You have shelves FULL of paint! I can see it!

Financial Adviser: But that doesn’t mean that we have paint available. Regulations mean that we can sell only a certain number of cans on any given weekend. Oh, and by the way, I notice that due to an unexpected increase in our Painting Industry Compensate Everyone for Everything That is Not Our Fault levy that has just come through, our pricing software has updated showing the price per litre just went to £16. We don’t have any more £12 paint.

Customer: The price went up as we were talking?

Financial Adviser: Yes, sir. We change the prices lots of times per week to reflect the cost of regulatory changes and unexpected regulatory fees. Since you haven’t actually walked out with your paint yet, we just had to change prices to reflect this. I suggest you purchase your paint as soon as possible. How many litres do you want?

Customer: Well, maybe five litres, no make that six so I’ll have enough.

Financial Adviser: Oh no, sir, you can’t do that. If you buy paint and don’t use it, there are penalties and possible confiscation of the paint by the manufacturer, that’s regulation for you. If you change any colours there is a £50.00 switching fee, even if it is the same brand. Also, we give no refunds.

Customer: WHAT?

Financial Adviser: We can sell enough paint to do your kitchen, bathroom, hall and master bedroom, but if you stop painting before you do that bedroom, you will lose your remaining litres of paint.

Customer: What does it matter whether I use all the paint? I already will have paid you for it!

Financial Adviser: We make our TCF plans based upon the idea that all our paint is used, every drop. If you don’t, it causes us all sorts of regulatory problems.

Customer: This is crazy!! I suppose something terrible happens to me if I don’t keep painting until after Saturday night!

Financial Adviser: Oh yes! Every litre you bought automatically becomes the £200 paint and we will bill you accordingly for the shortfall.

Customer: But what are all these, “Paint on sale from £12 a litre” signs?

Financial Adviser: Well that’s for our budget paint. It only comes in half-litres. One £6 half-litre can will do half a room. The second half-litre to complete the room is £20. None of the cans are checked or have labels, some may be empty and there are no refunds, not even on the empty cans.

Customer: To hell with this! I’ll buy what I need somewhere else!

Financial Adviser: I don’t think so, sir. You may be able to buy paint for your bathroom and bedrooms, and your kitchen and dining room from someone else, but you won’t be able to paint your connecting hall and stairway from anyone but us. And I should point out, sir, that if you paint in only one direction, it will be £300 per litre.

Customer: I thought your most expensive paint was £200!

Financial Adviser: That’s if you paint around the room to the point at which you started. A hallway is different, you cannot believe the regulations we have to consider when selling paint!

Customer: And if I buy £200 paint for the hall, but only paint in one direction, you’ll confiscate the remaining paint.

Financial Adviser: Yes, and we’ll charge you an extra use fee plus the difference on your next cans of paint. But I believe you’re getting it now sir, regulation impacts upon everyone in some strange and unintended ways.

Customer: You’re insane!

Financial Adviser: Thanks for shopping with Conundrum & Confusing Financial Advisers and…….. have a nice day!

It’s about the compensation stupid

We read that “BP has launched an appeal against “fictitious” and “absurd” oil spill compensation payouts

Matters have got so bad that they have asked a Judge to “temporarily halt the payments being made to businesses on an ‘economic loss’ basis”.

BP presented a number of examples to illustrate the madness of the compensation feeding frenzy citing businesses that were nowhere near the coastline affected, one firm was many miles away from the Gulf of Mexico oil spill and it “enjoyed bigger profits during the year of the spill in 2010 and yet still received millions in compensation”.

This is looking like the first example of a very major international business having its future and shareholders interests affected because it agreed to pay compensation in what seemed to be a fair and generous way with the ‘outcome’ (yes that word again) being that fairness was replaced by greed, and as the song goes ‘lawyers guns and money’.

BP has already sold a substantial part of its business to pay out compensation and fines as a result of the disaster and has said it could be ‘irreparably harmed’ by the payouts because they could cost it ‘billions‘ more than it budgeted for when it agreed to a settlement in April 2012.

In its application to the court some of the examples BP offered of ‘absurd’ claims included: a $21 million payment made to a rice mill in Louisiana situated some 40 miles from the coast that earned more revenue than in spill year of 2010 than in the previous three years.

It also made reference to $9.7 million paid out to a highway, street and bridge construction company in northern Alabama, almost 200 miles from the Gulf, which does no business in the region and for which 2010 was its best year on record.

As they say when America sneezes we get flu.

Compensation culture in the UK, fuelled by the pestilence and plague of CMC’s no win no fee legal offers, legal aid and regulatory action has ensured that the compensation trough can see plenty of snouts taking their fill.

Influenza matters in the UK have got so bad that we now see a proliferation of fraudulent claim ‘reporting’ sites.

Here are some examples: the government has Report Benefit Fraud, the insurance industry has the Insurance Fraud Bureau and the Engineering Council sees they have a serious problem around qualifications citing three examples that they are trying to combat.

We even see sites to alert potential fraudsters about how their actions are detected. And one real whopper of a site is dealing with a whole load more.

Have we become a nation of fraudsters created by consumer protection ‘on acid’ where consumers take no responsibility for their own bad decisions because a regulator will make sure somebody else pays where it would appear from the levels of fraud it was not their fault at all.

Regulation is a vital part of UK life today, sadly in many ways, yet it adds so many additional costs and burdens on good, honest businesses.

Surely something must be done to ensure that those who have actually lost out, through no fault of their own, get appropriately compensated and those that have not get dealt with robustly by the legal system, and without the protection of legal aid or in our industry the seemingly automatic call for funds, without limit or logic, from the FCA, FOS and FCSC.

Mr. Creosote regrets……..

Over eat

We hear that ESMA (The European Securities and Markets Authority) the euro regulator, is looking to increase their “Mr. Creosote” dietary intake of cash.

ESMA,  along with many other Euro regulatory bodies, was set up in January 2011. They reason that the cash is needed because “mission creep” is taking it from legislation drafting to regulating the regulators.

Have things got so bad with powerless or spineless governments, that regulators now need regulating or is the mission creep part of a euro wide regulatory “job breeding programme’ designed for the boys by the boys?

ESMA’s diet is fed by way of ingesting money from regulators in member states as well as the EU itself and it is understood that the FCA and PRA will be sending ‘food aid’ in the form of nearly £1.8m in ‘readies’.

Steven Maijoor, a career euro regulator who heads up ESMA, reckons that their funding model, rather like Mr. Creosote’s diet, is becoming a problem and that the cost of feeding the voracious appetite has the potential to stunt it’s growth.

He said in 2012 “We have 85 staff now and expect to have 100 members of staff by the end of this year and then a further 60 members of staff by the end of 2013. Resourcing is not easy under the current austerity measures in Europe, as we are partly funded by the national regulatory authorities of the member states, many of whom are under budgetary pressures themselves. However, we think that the projected staffing levels are reasonable given the work Esma has to do.

He went on to say,  “It is still our strong wish to be funded through the EU budget rather than through the national authorities directly. The way we are funded is not consistent with the way other European institutions are funded and so we should move to 100% EU funding, especially as Esma grows and the bill gets larger for national authorities”.

Is this is yet another example of Europe creating regulation for regulation’s sake. The logical approach, something not ever found in the world of regulation, would be that regulation is either all done through Europe as a common policy or through member states with ultimate control of regulation by their democratically elected governments.

But not both!

UK financial services firms have seen significant increases in regulatory costs in recent years. The FCA and the PRA have a combined total budget for 2013/14 of £646.3m, a 15 per cent increase on the defunct FSA budget of £559.8m set for 2012/13. Advisers are seeing increases of over 15% in regulatory fees from £32.8m in 2012/13 to £37.9m in 2013/14.

How long till the “Waffer thin” mint is eaten?