Investors have pulled more than £1.5bn from open-ended property funds in the year to date, more than in the whole of 2016 when withdrawals from a clutch of funds were halted in the aftermath of the Brexit referendum.
Property funds have come under heavy scrutiny this week after M&G Property Portfolio, a £2.5bn property fund, closed the door on investor withdrawals on Wednesday.
M&G’s decision came after investors rushed to pull money from the fund in recent months, amid worries over Brexit and the turbulent outlook for retail property and the UK high street.
Data from Morningstar illustrates a spike in withdrawals around the time of the Brexit referendum in 2016, when seven major open-ended property funds were forced to suspend redemptions.
The sector recovered some of its outflows in 2017 but registered a net fall in 2018. In the year to date, however, investors have withdrawn more than £1.5bn from the sector, with redemptions jumping from £298m in the three months to June to £775m in the third quarter.
What went wrong at M&G? Unlike funds with investments in highly liquid stocks and shares, open-ended property funds walk a tightrope between investing in long-term assets that may require several years to produce returns and fulfilling the expectations of investors that they should be able to pull their money out on demand. In M&G’s case, investors wanted their money back faster than it was able to sell assets in the fund.
As the fund raised the drawbridge, it cited “unusually high and sustainable outflows”, combined with economic and political conditions that had made it difficult to sell parts of its portfolio in time to meet investors’ redemptions.
A wave of similar problems hit the sector in 2016 after the EU referendum, when investors became fearful about the economic outlook but found themselves trapped in property funds which had been forced to halt withdrawals. Janus Henderson, M&G, Aviva, Standard Life and Columbia Threadneedle were among the funds that pulled down the shutters — though all had reopened by December the same year.
Closed-ended property funds or real estate investment trusts (Reits) are not subject to the same pressures, as they issue shares to investors who can sell them on the secondary market, without forcing the fund manager to sell the underlying property assets.
The previous problems came after the shock of the referendum result. Why has the M&G fund gated now? The pressures on the M&G property fund have been building for a long time, but its relatively heavy investment in the UK high street and retail parks — with nearly 40 per cent of its value in retail property — made it more vulnerable than other funds to the downturn afflicting the sector. It has been a terrible year for retailers, with big names such as Debenhams, Patisserie Valerie, Thomas Cook and Mothercare falling into administration, and plenty of others closing stores as sales continue to move online.
As the country heads to the polls in the general election, M&G also cited political uncertainty as a factor constraining its ability to find buyers for its assets.
When can investors expect to regain access to their money? After its first Brexit-induced closure, M&G reopened four months later in November 2016. However it is hard to say how long investors will remain trapped this time round, particularly if, as some investment experts warn, other property funds will now come under similar pressure to halt withdrawals and sell assets to raise cash.
M&G said it would waive 30 per cent of its annual charge to investors for as long as withdrawals were barred. It added that the suspension would be monitored every day and formally reviewed every 28 days, with a view to “reopening as soon as liquidity levels have been sufficiently rebuilt”.
What does it mean for the wider market? The perils of holding illiquid assets in open-ended funds were painfully exposed in other parts of the fund industry after the implosion of Neil Woodford’s investment empire. The star fund manager spectacularly fell from grace after investing heavily in hard-to-sell assets and unquoted stocks.
Rebecca O’Keeffe, head of investment at Interactive Investor, said it was disappointing that the industry still held these kinds of assets in open-ended funds. “It is quite frankly crazy to put these illiquid assets . . . into an open-ended fund. You are potentially asking to be a forced seller in stressed markets, which is very bad news for investors.”
The Financial Conduct Authority, which has been closely monitoring the flows of money to and from open-ended property funds, is bringing in new rules in September 2020 to make investors aware of the particular risks of illiquid funds.