Demands for fee reductions and cost cutting strategies mean changes are inevitable says Bob Marsh, managing director, Taliance
Like many, real estate investors and asset managers have experienced a loud wake-up call over the past few years. In the heady pre-recession days of the early ‘noughties’, significant returns on investment were almost guaranteed. There was no need to analyse and attempt to improve workflow, processes or re-assess the tools used to achieve results. The only question was: ‘Will the results be good – or very good?’
Now constant pressure to reduce fees is forcing the issue. Cutting costs and identifying ways of doing more for less is a necessity. Where asset managers were once in charge of, say 10 assets, they are now being asked to look after 20, 30 or more, so reducing their ability to be responsive.
Clients unsettled by nervous markets are demanding more detailed and longer-term forecasting with multiple investment scenarios for better-informed decisions. At the same time, ever-evolving regulatory requirements are always in the background piling on further complexity and pressure. Many within the industry have come to the realisation that they can no longer just carry on doing what they have always done.
While many other professions and areas of business have taken advantage of specially-tailored software solutions, until now the property investment market has been at a loss as there has been a lack of comprehensive management and forecasting solutions for the asset and fund teams.
It’s almost as if the spread sheet has been too useful; after all it provides an independent and creative environment for modellers enabling them to input any formula, structure or design. But, spread sheets are becoming increasingly high-risk as market demands intensify and risk management becomes even more a core activity
Real Estate investment is complex compared with share dealing where investors simply buy and then hold or sell. Real Estate involves a long chain including property and facilities managers, assessing values is more difficult and there are more opportunities for data to be corrupted. This is especially the case if siloed information is consolidated manually using ’cut and paste’ techniques or even re-keying.
When data comes from many separate sources, how can its integrity be assured? This data can be easily compromised by mistakes such as a mis-typed number which then ripples exponentially through an entire spread sheet, quietly wreaking havoc.
If a client decides to extend their portfolio and changes need to be made, this revision has to be reflected throughout the spread sheet. Checking and subsequent re-work is tedious, but essential. As a result, asset managers can easily spend half a day verifying or recreating information when changes are made. But, when errors are made, there’s no record or audit trail of what has happened.
It seems that old-school methods are no longer coping with today’s demands, but what are the other options?
Traditional software systems are ’black boxes’; data is entered, processed and new data emerges. But, the fund world wants to see the formulas used and understand exactly what’s happening to the figures and models. No wonder spread sheets have remained the default tools for so long.
However, new software is coming on to the market. Smart software as it’s become known – is many steps ahead of these older systems. It provides all the benefits of spread sheets, but with the safety, flexibility and ‘auditability’ needed in today’s environment, while still enabling users to ’flex’ models.
Smart software sits on existing accounting solutions, but extracts the data from source. This means this data is no longer being re-entered manually or ‘cut and pasted’. It is totally connected to all other available information and will automatically react accordingly when any change is made. For instance, it will understand when ownership of a property starts and finishes or when the share held by the client varies – and the solutions will apply this information where appropriate – automatically.
The fund modeller who designs the investment structure is still key to the whole operation. But, they no longer have to manage the model, the system takes over. This leaves them free to become more innovative.
As data updates automatically as amendments are made, modellers and others can investigate an unlimited number of different scenarios to identify ways to create value, they can save these for reference and comparison purposes. They can run cashflow calculations and test the effect of different factors on all key performance indicators. Risk compliance teams have a comprehensive audit engine which tracks every change and gives full historical records.
Fund managers can use the software to flex models and provide fast feedback in near real-time. Questions such as: ‘What’s the best time to sell a property?’ or ‘What’s the impact if a tenant extends their lease or leaves?’ no longer take hours to answer.
This capacity to hold and process data in an intelligent way allows entire businesses to expand more easily without becoming overwhelmed by the need to manage and understand cumbersome data in multiple formats and from variety of locations.
One of our international fund manager customers has recently consolidated its asset management and funding processes in this way. It was concerned about the level of risk and limitations of working with spread sheets using data from disparate files and collected from a range of different workflows. Instead of working across separate silos and on spread sheets, its implementation of smart software now provides them with a continuously updated vision of all real estate, financial and accounting information, regardless of the physical location of the investments.
If the current economic clouds do have a silver lining for the industry it might well be this. Increasingly, many big names within the sector – and their smaller counterparts too – are identifying smart software as a way of coping with these roller coaster times. Those willing to make the move can help improve investor confidence, address regulatory demands, increase profitability – and be well-prepared for future challenges with a work force capable of handling the increased load.
COVID-19 and PCL property – a market on the rise?
By Alpa Bhakta, CEO of Butterfield Mortgages Limited
Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.
Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.
Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.
However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.
Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.
However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.
Investors are flocking to PCL opportunities
The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.
Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.
Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.
So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.
Remote working and PCL
On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.
While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.
Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.
A busy few months
Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.
In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.
Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood
The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.
The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.
Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.
Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.
Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.
Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.
Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.
We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.
We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.
We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.
On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.
Optimising tax reclaim through tech: What wealth managers need to know in trying times
By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange
This has been a year of trials: first, a global pandemic and, now, many countries facing the very real possibility of a recession. For investors, private banks, and wealth managers, these tumultuous times have manifested largely in asset price volatility, ultra-low interest rates and uncertainty about when things may level out, as well as questions about what can be done to safeguard portfolio performance.
The answer here lies within identifying and creating efficiencies to maximise performance and minimise cost, and while there is a slew of options as to how to do this, they are often siloed or have a single USP. Tax optimisation, on the other hand, provides benefits to all, not just in increasing returns for investors, but also in creating economies of scale across stakeholders, creating millions – if not billions – in savings for banks.
Evolving tax reclaim
The tax reclaim process used to be a tedious one banks had to manage themselves, and required detailed, industry and country-specific knowledge to stay on top of constantly shifting requirements and regulations. And when we consider that many countries – such as the UK – allow for capital gains exemptions, tax optimisation may not seem like an integral part of the process. However, this isn’t the case for all countries, and can lead to severe after-tax implications on global portfolios.
Furthermore, even if you’re able to avoid double taxation, getting the money back is not always as simple as it sounds. This, combined with the fact that countries often have contradictory taxation rules or requirements, makes navigating the tax reclaim space a challenge even for those with the right expertise and experience.
Ultimately, providing tax optimisation to investors ends up being a heavy lift for private banks and wealth managers, who often don’t have the right solutions, are relying on outdated technology and manual processes. While this is generally fine for business, it is no longer fit for the purpose when it comes to tax optimisation. To date, knowledge and expertise have been the key to protecting and maintaining profitable investments and avoiding tax leakage. However, through tax optimisation services starting to emerge, portfolio managers can now manage and reinvest easily.
Today, technology has evolved the process so that banks are able to access and submit tax reclaim – and the relevant documentation – online, leaving the tech provider to coordinate next steps with custodians and tax authorities behind the scenes. In essence, taking the legwork out of the process while assuring consistency and completeness in execution.
Simplifying tax through tech
While tax optimisation may seem like an easy choice in theory, it is not always the go-to for every private bank or wealth manager. Without the right supports and setup, including innovative technologies and automation, tax reporting must be done manually, leading to labour intensive processes and huge time wastage. Changing these processes can be overwhelming for those used to a certain way of operating.
By making tax reclaim digital, banks will be more able to optimise returns and gain efficiencies while reducing redundancies and unnecessary complexities. Cloud based solutions or platforms can offer a safe and secure solution for banks, wealth managers, and investors to access and submit any information required, processing the data automatically for conformity and completeness.
It is critical that providers who intend to offer tax services are able to do so efficiently with the right software and data processing capabilities. Not only does this drive continuity in service and efficiencies in process, but it is the only sustainable way to handle such a complex landscape sustainably without wasting time or money.
End-to-end, technologically driven tax services offer a huge number of advantages to private banks and wealth managers, the most important of which is the ability to provide continuity through tumultuous times. As we move through the end of 2020 into 2021 this will only be increasingly important as banks, managers and investors look to provide new services to clients and strengthen existing relationships in a difficult market.
As investors seek to find returns amid the global economic downturn, the demand for innovative solutions will only increase. Technology like cloud-based software, AI, and data optimisation can all serve to improve not just the tax reclaim processes, but the overall client experience within capital markets. Private banks and wealth managers are suitably equipped to provide these innovative solutions, but those who do not prepare themselves effectively and keep ahead of trends will run the risk of losing current and new clients to someone who can offer more for less.
Beyond Transactions: The Payment Revolution
By Marwan Forzley, CEO of Veem The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first...
The UK’s hidden payments crisis: why businesses should rethink their payments strategy
By Edwin Abl, Chief Marketing Officer at Modulr. As the economic conditions imposed by the Coronavirus endure, businesses are facing a...
Investing into a more sustainable future: changing businesses from the inside out
By Shawn Welch, Vice President and General Manager of Hi-Cone Worldwide As industries across the world are facing unprecedented uncertainty...
Securing Information Throughout the Supply Chain – Preventing Supplier Vulnerabilities
By Adam Strange, Data Classification Specialist, HelpSystems The financial services sector is experiencing extreme disruption coupled with rapid innovation as...
RegTech 2020: The rise of Open Banking
This month on the RegTech 20:20 podcast, host Alex Ford is joined by industry experts Gavin Littlejohn, Chairman of The...
The case for AI technology adoption in financial back-office roles to improve efficiency
By Tomas Gogar, AI CEO, Rossum In this era, digital transformation isn’t anything new. Nonetheless, it can still cause a...
Gain financial regulation qualification online
Gain financial regulation qualification online Warwick Business School in partnership with the Bank of England are delighted to offer...
COVID-19: Dealing with fraudulent applications for the Bounce Back Loan Scheme
By Ed Lloyd, EVP Global Head of Sales, Encompass The COVID-19 pandemic is still having a devastating impact on businesses...
EU Commission sets out new intellectual property action plan affecting SEPs, patent pooling and EU design protection
By Andrew White, Partner and UK & European patent attorney at intellectual property firm, Mathys & Squire The EU Commission...
InsurTech is helping to drive the digital evolution of the UK motor retail industry
By Alan Inskip, Tempcover CEO & Founder If the last nine months have made anything clear, it is that the...