Managers of listed property vehicles have spied an opportunity to flag the benefits of the closed-ended structure as two open-ended property funds remain frozen and the industry awaits the outcome of the Financial Conduct Authority’s consultation on liquidity.
Earlier this week, the authorised corporate director of the M&G Property Portfolio announced the fund will reopen on 10 May after almost 17 months of being frozen. The fund was shut to trading in December 2019 due to liquidity reasons after its independent valuer slashed the value of its retail holdings, prompting a wave of redemptions.
Just two open-ended funds left still closed
M&G’s fund reopening leaves just the Aegon Property Income and the Aviva Investors UK Property funds still closed – the only two out of the raft of funds forced to suspend trading last March as the Covid pandemic made it difficult to value underlying assets.
Aegon Asset Management says the fund remains on course to reopen in Q2 and the managers continue to make good progress with asset sales in order to raise liquidity.
Aviva Investors says the fund remains closed while it takes action to ensure a flow of liquidity. “We are mindful that the fund could experience a higher-than-usual volume of redemption requests if it was to reopen for dealing,” it says.
M&G makes changes prior to reopening
Ahead of reopening, M&G has bumped the cash position to 33% and will implement dual pricing on a full spread basis from 25 June. AJ Bell head of active portfolios Ryan Hughes says this is a sensible move because it deters investors from dipping in and out.
Pricing on a full spread basis, means the buying, or offer, price is typically higher than the selling price, often around 5%, in order to make the buyer suffer the transaction costs of the underlying investments. This means an investor buying the fund is effectively paying a charge of whatever the spread is to access the fund.
Hughes says: “This is a much fairer way of ensuring that people who want to buy property are doing it for the right reasons, and that they understand that there will be a high cost of accessing the funds. Effectively what it’s trying to do is flush out those people that might have been doing it for the wrong reasons.”
M&G has also said it won’t charge fees on cash held in the portfolio above 20% which Hughes says “sticks in the throat a bit”. But he says most property funds do this and until the results of the FCA’s consultation, which proposes to exclude Isa investors while introducing a 180-day notice period, they are all likely to run high cash levels.
“Obviously if the FCA sides with the Bank of England and says these funds need to move to a notice period because they’ve got a liquidity mismatch then that’s a whole new ballgame, which is going to cause some real issues.”
Liquidity remains front and centre
Until then it seems liquidity remains an issue that will bug open-ended property funds which have haemorrhaged cash recently.
Mayfair Capital non-executive chairman James Thornton says figures from daily traded funds paint a negative picture for commercial property, with outflows of £128m in January, £314m in February and a record £589m in March.
“We believe this activity is stimulated more by structural issues with these funds rather than pessimism towards the asset class,” he says.
Thornton welcomes the FCA’s proposals to exclude Isa investors and increase the notice period.
He adds: “Retail investors may feel that real estate investment trusts are a more attractive means of gaining exposure to commercial property if they are willing to accept the risk of higher volatility in return for instant liquidity.
“UK Reits, particularly those with a low or zero retail exposure, have performed well this year with yields of 3% to 4% available. However, given that they are investment trusts, they trade at a premium or a discount, whereas daily-traded funds are priced on a net asset value basis in normal conditions.”
Inflation-protected growth
Cohen & Steers head of Europe real estate and a senior portfolio manager Rogier Quirijns thinks in an environment that has been dominated in recent years by Brexit, the euro crisis, and the coronavirus pandemic, investors are shunning illiquid assets.
He says Reits offer an alternative to investors on the fixed income side and who want to complement their portfolio with income that can grow and is inflation protected.
“Because of this, we see a huge opportunity for retail investors – and in that respect, we want to grow within the European retail market.”
He adds: “The open-ended funds that have historically been more popular with retail investors in Europe remain under severe pressure given its illiquid character and lower return and higher risk profile. We would argue these funds are less diversified from a regional and real estate sector point of view and are illiquid at the same time – a toxic mix in the current environment.”
PGIM Global Select Real Estate Securities fund manager Rick Romano says valuations in most Reit sub-sectors are below historical averages across the globe and a reversion to the mean on valuations would provide upside.
Second, he adds, Reits offer a relative value opportunity compared to other risk-seeking assets. “Panicked selling in the early stages of the pandemic caused a significant drop in prices, which have yet to fully recover,” he says.
Finally, Romano thinks a stable interest rate environment has typically been favourable for returns in real estate.
“With interest rates low and seemingly steady, real estate should be a sector that provides both strong yields and total returns.”
