Points of View: “Bricks and mortar” property funds

M&G’s recent announcement that it had suspended dealing in its UK Property Portfolio Fund came as an unwelcome surprise to investors.

M&G released a statement showing outflows of £1bn over the last 12 months. Brexit uncertainty was cited as a reason and this is certainly a factor but the trigger for the actual suspension was that the fund looked likely to run out of money to meet redemption requests. In recognition of the problems suspension may cause to investors, M&G has agreed to waive 30% of it annual management fee for so long as the suspension remains in place.

The big question, of course, is whether other “bricks and mortar” funds will follow suit. The last time this happened, just over three years ago, was again a reaction to concerns over Brexit and resulted in over half of the £25bn invested in this sector being frozen for. In terms of what has happened to the sector over the last 12 months, some £2.5bn may have been withdrawn, with £250m of this in November alone and that month clocking up the 14th consecutive month of outflows. Much of this has been due to investors seeing the writing on the wall - two fifths of commercial property is invested in retail and that sector is being destroyed by online sales, with plentiful examples of landlords having to accept lower rents or see empty properties on which they still have to pay business rates.

One of the consequences of 2016 was that property funds started running with substantially higher cash reserves. These cash levels should be large enough to enable most funds to withstand all but panic levels of withdrawals, but the effect of holding so much cash can be detrimental to both capital returns and dividend yields. At NW Brown our preference has always been to avoid the risk of liquidity problems by investing in property share funds.



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