M&G, a prominent fund manager, has announced the closure of its property fund valued at £565 million. This decision comes in the wake of continued outflows from UK retail investors, who appear to be retreating from a real estate market perceived as struggling. This fund’s closure isn’t an overnight occurrence; it’s the culmination of fluctuating investor interest and market challenges that have been brewing for years.
Starting from October 19, M&G has suspended daily dealings in this fund due to what they term “declining interest” from retail investors. Their plan? To sell off the assets that the fund comprises and return the raised capital to their clients. However, this isn’t a process that will happen overnight. M&G anticipates that this could be an 18-month process, during which investors will be left in a state of limbo, awaiting the return of their investments.
A History of Suspensions
This isn’t the first time M&G’s property fund has hit a snag. In fact, this marks the third major interruption for the fund in just seven years. Such suspensions spell significant frustration for investors, as noted by Ryan Hughes, head of investment partnerships at AJ Bell. This situation also potentially puts M&G at a disadvantage; prospective buyers, aware of M&G’s urgency to sell, are in a stronger position to negotiate.
Despite the suspension, investors haven’t escaped ongoing fees, although there’s a small silver lining: M&G has reduced these fees from 0.8% to 0.6% per year. Additionally, these charges won’t apply to any cash component of the fund, and there’s an intention to continue income distributions throughout this winding-up period.
UK’s Property Fund Sector Under Pressure
M&G’s recent move is symptomatic of broader tensions within the UK’s property fund sector. Post-Brexit anxiety in 2016 and the pandemic’s onset in 2020 led to multiple fund suspensions when the future value of properties, especially office spaces, seemed dubious. These events triggered fear of a liquidity crisis, prompting a review by the UK’s Financial Conduct Authority (FCA) in 2020. However, the FCA didn’t go as far as to prohibit daily trading funds from including illiquid property assets.
Neal Brooks, M&G’s global head of product and distribution, cited dwindling retail investor participation as a significant challenge, particularly for those desiring daily liquidity. He highlighted the difficulty fund managers have faced in maintaining diversified portfolios, thanks to high transaction costs and a smaller fund size, against a backdrop of ongoing and potentially increasing outflows.
Past Suspensions and the Road to Closure
M&G’s property fund has had a tumultuous journey, first suspending trading in 2016 in the aftermath of the Brexit vote, at which time it held assets of $4.4 billion. It reopened later that year, only to suspend trading again in December 2019 due to substantial customer withdrawals spurred by lingering Brexit concerns. The fund resumed in May 2021, but assets have dwindled to £565 million.
Recent economic policies have compounded these challenges. With central banks hiking borrowing costs, property funds, including several large names like M&G, Schroders, Columbia Threadneedle, and BlackRock, have had to limit withdrawals, especially after the economic measures introduced in Kwasi Kwarteng’s mini-Budget last September.
More Fund Closures on the Horizon?
Janus Henderson, another asset management firm, also wound up its UK property fund last year, pointing to the persistent uncertainties daily dealing property funds face. Oli Creasey of Quilter Cheviot wasn’t shocked by M&G’s announcement, considering the difficulties of diversifying real estate portfolios with assets under £1 billion.
Creasey suggests this could be just the beginning, noting that even the largest remaining property funds have shrunk due to decreasing valuations and client outflows in 2022’s latter half. This trend continues with Canada Life Asset Management recently halting withdrawals from its £254 million UK property fund, following a majority of investors seeking an exit.
A Cautionary Tale
M&G’s fund closure serves as a stark reminder of the volatility within the real estate investment sector, influenced by market uncertainties and macroeconomic policies. For retail investors, it underscores the need for due diligence, diversification, and a keen understanding of the liquidity risks associated with property funds. While property can be a valuable component of a balanced portfolio, the events impacting firms like M&G highlight the importance of a cautious and well-informed approach to investing, particularly in times of market turmoil.