Investors in UK property funds have had their ups and downs since the Brexit vote. Now they are losing patience.
Last week, fund manager M&G announced plans to close its £565mn property fund and return cash to clients, citing declining interest from retail investors. A day later, St James’s Place suspended trading in its £829.5mn property unit trust after a surge in redemption requests.
A third property fund, run by Canada Life Asset Management, at the beginning of the month announced plans to close for the same reason. “Following recent redemption requests from investors, we have concluded . . . the fund will not be commercially viable,” said Michael White, head of UK property at Canada Life Asset Management.
It is not the first time UK investors have had this experience. Property funds have lived through rushes for the exit and temporary closures on and off since 2016.
But rising interest rates have caused a marked shift in investment away from these funds, which come with worries about rising debt costs and empty post-pandemic offices, and towards fixed income and cash products which look more attractive and safer.
Max Nimmo, a real estate analyst at stockbroker Numis, pointed out the particular problems for “open-ended” property funds, which allow daily dealing when the underlying asset is inherently illiquid.
“After several fund gatings in recent years, confidence in the open-ended vehicles has continued to dwindle,” he said. “We are surprised it has taken this long for the market to accept this.”
Redemptions from UK property funds have been consistently high over the past year, with between £50mn and £190mn taken out on a net basis each month, according to Morningstar.
Some £1.4bn has left the market in that period, cutting its total value to £10.4bn at the end of September, compared with a peak of £35bn in April 2016.
This “dripping tap” of constant redemptions makes it harder for fund managers to fulfil requests as the cash in the fund shrinks, said Oli Creasey, head of property research at investment management group Quilter Cheviot.
“If [funds] have sold properties that are liquid and desirable, you start looking down the list to properties that would take six months to sell,” he said. This includes shopping centres and big office blocks, for which buyers are few and far between.
The past few months have driven a further chill in the commercial real estate market. Global central bankers have said that even if interest rates are not raised further, they are likely to remain high for some time.
Keith Breslauer, managing director of real estate fund manager Patron Capital, said that for real estate owners “this implies that they will have to deal with a high cost of debt for a long time, and if you have a high cost of borrowing, valuations will drop”.
Open-ended funds give retail investors options to put money to work in commercial property, an asset class that would otherwise be very hard to access. The structure allows investors easily to buy into or sell out of the fund, however this is at odds with the months it can take to buy or sell underlying properties.
Open-ended property funds are particularly popular in the UK, so UK investors have been more affected if withdrawals are blocked because of market turbulence and a sudden rise in redemption requests. But property funds elsewhere have also been hit by investor withdrawals.
At the end of 2022, Blackstone, the world’s biggest alternative asset manager, limited investors’ ability to withdraw from its closed-end $66bn Real Estate Income Trust after receiving a high number of redemption requests, although the company said there had been a sharp decline in requests since then.
In the UK, Financial Conduct Authority rules require property fund managers to consider suspending funds during extreme market conditions, which happened in 2016 after the Brexit vote, in 2020 during the pandemic, and at the end of last year as a result of the “mini” Budget.
There have been calls for more action to protect UK property fund investors, with the FCA launching a consultation in August 2020 on reducing the potential for investor harm.
One of the next steps is the outcome of a separate government consultation on how a 90-180 day notice period for redemptions, proposed by the FCA consultation, would affect “individual savings accounts”. These tax-efficient savings accounts are required to allow customers access to their funds or transfers to another Isa within 30 days of a request.
HMRC, which is running the Isa consultation, told the Financial Times it was still considering the results.
Regulators elsewhere have also turned their attention to the problem. The European Central Bank in April called for reforms to commercial property funds to reduce the potential risk to “wider financial stability”, if investors rush to withdraw their money en masse.
The Financial Stability Board and International Organization of Securities Commissions said in July that fund managers investing in illiquid assets should charge clients for withdrawals to discourage investors from rushing for the exit if there was market turbulence.
But all this comes too late for investors in the recently suspended UK funds.
M&G has told customers there will be a wait of up to 18 months to get all their money back. “We considered various options, but believe this is the right decision for our investors,” said Neal Brooks, global head of product and distribution at M&G.
Meanwhile, SJP director of investments Tom Beal said previously in a statement that the company was: “Assessing market conditions and closely monitoring valuations of properties within the fund. We are committed to resuming dealing as soon as we are satisfied that conditions are right.”