A £1.1bn open-ended property fund that was forced to suspend redemptions last July is seeking liquidity through an initial public offering. According to an intention to float document posted to the stock exchange this week, the Brandeaux Student Accommodation Fund wants to raise at least £400m from institutional investors under the less tainted 'Liberty Living' brand - the name of the Brandeaux subsidiary that manages the student digs. The money will be used to repay frustrated shareholders in the existing open-ended vehicle, including many private investors.
The bad news is that existing shareholders will have to take a hit to their capital. The company is reluctant to divulge full details, but a note sent to fund holders pointed to a decline of 11 per cent in the value of the shares since redemptions were suspended.
It gave three reasons for the decline. First, the portfolio value has been marked down by Savills, the valuers, from £1.2bn last summer to just over £1.1bn. Second, there will be legal, auditing and other costs associated with the change of fund structure. Third, unlike the existing open-ended entity, the real-estate investment trust (Reit), Liberty Living, will own the management company, Brandeaux. This involves buying out the current owners - who will then manage the Reit - at a cost of £23m.
Investors in the existing fund will be relieved to have the option of getting their money back. But this is a costly outcome, which lays bare the risks of handing money over to offshore fund managers with little reputation to defend. It is hardly fair that existing unit holders have to shoulder the costs of preparing the fund for flotation, including internalising the management team - a move designed to make the company more attractive to new equity investors.
But, for these, the arrangement is ideal: the only costs they have to bear are the commissions associated with the flotation, typically about 2 per cent of book value. In exchange, they get liquid exposure to a large, well-diversified portfolio in a very healthy property subsector at a written-down valuation.
This last point is crucial: it is to be hoped the new valuation is realistic. It equates to about £66,000 a room - down from over £70,000. The latest valuation for USAF, an institutional student fund run by Unite Group (UTG), works out at £63,000 a room. The company needs to explain this premium.
