Property fund redemptions hold steady as another £186m heads out the door

UK property funds have seen another £186m head out the door in June as uncertainty around the outlook for the sector persists.  

Estimates from Morningstar prepared for Portfolio Adviser reveal the pace of outflows has remained broadly consistent in the second quarter of 2021.

In May, the sector suffered its worst monthly redemptions of the past year as investors pulled around £880m. Most of this was down to the M&G Property Portfolio, however, which Portfolio Adviser revealed saw investors redeem £806m in the first month after it ended its 17-month suspension. 

Redemptions for June were higher than April when property funds collectively shed £162m but less than the first three months of the year when investors withdrew £933m. 

See also: Investors yank £800m from M&G Property Portfolio within first month of reopening

In May, the Financial Conduct Authority cast further doubt on the sector when it postponed its decision on implementing notice periods for open-ended property funds until the third quarter to gather feedback on a new structure, the long-term asset fund, as a possible solution to the liquidity mismatch problem. 

Ben Yearsley, director at Fairview Investing, said while there are still investors who want exposure to physical property, outflows from the sector will likely continue until the regulator clarifies future rules. 

See also: Investors sceptical FCA LTAF proposal is the panacea for property fund liquidity mismatch

M&G Property Portfolio leads outflows for second month running

For the second month in a row, the M&G Property Portfolio saw the highest level of outflows of all UK property funds, although by June withdrawals had slowed significantly to £92m. Assets in the fund currently stand at £1.26bn. 

L&G UK Property, the largest fund in the sector, was the second worst in terms of redemptions. In June, investors yanked £26m, accounting for about 1% of its £2.2bn assets. This is a far cry from December 2020 when the fund shed £390m due to outflows.

Commenting on the flows data a LGIM spokesperson said the fund has “remained resilient against difficult market conditions” and delivered “strong performance relative to peers over both the short and long term”. The Paif ended 2020 down 1% while the IA UK Direct Property lost 3.6%, according to FE Fundinfo.

“We have seen fund flows in both directions, but across the spectrum, investors continue to see property as a key source of returns and diversification at a portfolio level,” the LGIM spokesperson said.

“We believe that property as an asset class remains attractive, and that the Paif remains well positioned to provide balanced property exposure to investors, with robust strategies in place that are aligned with our long-term views on structural changes in the property market.”

Other funds that suffered were BMO GAM UK Property, Threadneedle UK Paif and Canlife UK Property.

A spokesperson for Canada Life Asset Management said: “The firm cannot comment on the fund flows data but we can confirm there was an internal fund asset allocation at the beginning of June to reduce direct property exposure to be in line with DT modelling.”

Columbia Threadneedle declined to comment. Portfolio Adviser has reached out to the remaining two fund groups but did not hear back in time for publication.

Only one fund, the MGTS St Johns Property Authorised Trust, did not see redemptions last month, according to Morningstar. 

Property funds with highest outflows in June 

Source: Morningstar 

Too early to get bullish on commercial property

Tilney managing director Jason Hollands said he was not surprised to see redemptions across the sector have slowed.  

“There was a pent-up stack of redemptions in these funds built up over many months and so, with that largely cleared, the pace of outflows has moderated,” he said.  Nevertheless, Hollands suggested “it is too early to get bullish on commercial property”. 

Though there are some “brighter spots”, such as depots and warehouses, which have benefited from the structural shift toward online shopping and home deliveries, clear headwinds exist as businesses adopt more flexible working policies and require less space, and store and restaurant chain closure programmes kick-in.

“For income seekers, in my view there is a greater potential for income growth from dividends from here over the medium term than from rental yields,” Hollands added. 

Over the year-to-date, the average IA UK Direct Property fund has returned 2.5%, according to FE Fundinfo. Since May, the sector has seen two casualties with Aviva Investors and Aegon deciding to wind-up their frozen property funds over liquidity concerns.

See also: Aegon to shut Property Income fund