The retail sector and open-ended property funds


If you are thinking of investing in a regulated property fund, you may want to pause for a moment and seek some expert advice from a party that specialises in this asset class (for the record, we do not).

The problems M&G are currently experiencing are linked to the demise of the retail sector. As shoppers abandon the High Street and order online, retailers have struggled and a number have gone bankrupt or sought rent reductions. This has impacted retail property values as well as income streams, resulting in astute investors headed for the door.

In the case of M&G, net outflows from its fund reached £901 million in the ten months to October, according to Morningstar. As a result, it was forced to gate the fund because of a wave of redemption requests that could otherwise have pushed it into fire sales of assets and so disadvantage investors sticking with the fund.

A lot of property funds have considerable exposure to the retail sector and have experienced the same problem; about £1.2 billion was pulled from these in the same period above.

Whilst the attractions of such funds were high yields and liquidity, the problem is that property is generally an illiquid asset. When there is a flood of redemptions, some funds have insufficient cash to honour them without selling the properties, which takes time. Holding more cash would be one solution, but this would impact on the eventual yield.

According to some, this was a problem that was always going to happen. Mark Carney, governor of the Bank of England, has said that such open-ended funds were “built on a lie”. Of course, not everyone agrees with that view and the good news is that not all such funds are affected. Much depends on the nature of the assets they hold and the sectors they are exposed to.

For those seeking to invest in this asset class, there are alternatives. For example, investment trusts are closed entities and never have to meet redemption requests. There are also dozens of listed property trusts (or Reits, as they are known). Each has its pros and cons, which is why expert advice is needed.

Unfortunately, the problem of liquidity and the illiquid nature of property will persist for some funds. Policymakers are planning reforms, but that is of little comfort for those who are locked in. Patience and faith may be required.


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