The recent announcement regarding the closure of M&G’s open-ended property fund, a significant player in the market, has raised eyebrows and concerns alike. This move didn’t exactly come as a surprise, according to Morningstar, especially since giants like Aegon and Aviva had already initiated the winding up of their property funds. However, the decision has inevitably cast a spotlight on the future of other funds in this sector, which collectively hold billions in investments.
M&G’s Closure: The Beginning of the End?
Starting from October 19, M&G ceased daily dealings in its Property Portfolio fund, marking the commencement of a winding-up process that could potentially stretch up to 18 months. Neal Brooks, the global head of product & distribution at M&G, justified this decision, citing “declining retail investor interest across this fund structure” and “uncertainty around their future composition.”
The rationale behind the declining interest isn’t hard to decipher. The sector has seen its fair share of upheavals, with funds frequently suspending operations in the wake of Brexit in 2016 and then again during the pandemic in 2020. These events significantly dented investor confidence, triggering increased outflows and erratic performance, especially after successive UK lockdowns took a heavy toll on the commercial property sector.
Ryan Hughes, head of investment partnerships at AJ Bell, remarks, “The writing has been on the wall” ever since. Every time a fund resumed operations post-suspension, it faced substantial outflows as investors lost faith.
Regulatory Dilemmas: The Liquidity Mismatch Issue
The second part of M&G’s rationale points towards ongoing deliberations by the regulator. The Financial Conduct Authority (FCA) has been mulling over the best course of action for open-ended property funds. These funds promise daily dealing, yet they’re backed by assets that aren’t suited for such frequent valuations due to their nature—properties can’t be bought or sold as quickly as stocks or bonds.
This notorious “liquidity mismatch” has been a longstanding thorn in the side of the industry. The FCA has spent years considering potential remedies, including the possibility of locking in investors for extended periods. However, this suggestion faces resistance as modern investors have grown accustomed to the convenience of frequent trading via various platforms and apps.
Despite the lack of a definitive resolution from the FCA, its remarks seem to forebode a grim future for open-ended property funds. Aviva Investors and Aegon have already kickstarted the wind-up process, slightly ahead of M&G.
The FCA has hinted at the concept of a “long-term assets fund,” drawing inspiration from more affluent nations like Norway with their sovereign wealth funds. Such a model would allow pension funds, once major contributors to property funds, to maintain exposure to this asset class without the hassles of daily dealing requirements. This approach essentially suggests a market split between institutional and retail investors, following a period of homogeneity during more prosperous times.
Post-Pandemic Commercial Property: A Changed Landscape
The ramifications of the pandemic continue to ripple through the property market. The emergence of hybrid working models and radical changes in the usage of commercial spaces in towns and cities complicate return predictions. Property fund managers once envisioned a post-pandemic era characterized by greater warehousing needs to avert supply chain disruptions. However, the discourse has evidently shifted.
The waning of the housing boom might also be interlinked. During the boom years, investors sought property exposure due to impressive performance figures. The advent of specialist investment trusts and exchange-traded funds (ETFs) has now allowed retail investors to selectively invest in appealing sectors like warehousing, logistics, storage, and e-commerce under the broader “commercial property” category.
For instance, Tritax Big Box (BBOX), a specialist in distribution centers and a member of the FTSE 250, now enjoys a market capitalization equalling that of M&G Property at its zenith, standing at £2.5 billion.
Neal Brooks reflects on the evolution since the fund’s inception in 2005, acknowledging that the market dynamics have significantly shifted since then.
As the industry anticipates the FCA’s conclusive report, the ongoing debate seems to have progressed beyond its original confines. Investors have demonstrated their stance through withdrawals, shrinking funds in the process. Furthermore, the current government under Sunak and Hunt seems to favor exposing pension funds to riskier, less liquid private markets to enhance returns, leaving the position of property in a conundrum.
Seeking Property Exposure: Are PAIFs the Answer?
Property Authorised Investment Funds (PAIFs) present an alternative route, Morningstar suggests. These open-ended funds make direct investments in commercial properties, encompassing large-scale assets like offices, shopping centers, and apartment complexes. However, they share the same liquidity concerns as other property investments: while stocks can be sold almost instantly, offloading buildings can be a protracted process.
The limitations of this structure became glaringly apparent post the 2016 Brexit referendum. Most open-ended property funds had to suspend trading amidst fears of a Brexit-induced property downturn and potential investor exodus. This scenario replayed during the pandemic, eroding investor patience and confidence.
Now, with M&G’s move possibly setting off another cascade of redemptions, all eyes are on the industry’s reactions and strategies for moving forward. The key question remains: How will these developments shape the future of property investments in the UK?