The M&G Property Portfolio could need to double its current cash levels before it can lift its suspension, commentators have suggested, as outflows from newly unfrozen property funds paint a sobering picture of the sector moving forward.
It has been over a year since M&G suspended dealing in the £2.1bn property fund on 4 December 2019 and for investors there is still no end date in sight.
While all the major UK property funds were forced to temporarily close in March after the Covid sell-off made it impossible to value their underlying assets, M&G Property Portfolio closed for liquidity reasons after its independent valuer Knight Frank slashed the value of its retail holdings by 7.7% last November, triggering a mass exodus.
Days before the one-year anniversary of the fund’s suspension M&G confirmed the “temporary” measure would continue, despite selling an additional four assets worth £110.8m in November, which boosted cash levels from 10% to 14.6%.
The disposals in the last month represent over a third of the £308.4m of assets that have been sold in the last 12-months.
Disposals remain a ‘work in progress’
AJ Bell head of active portfolios Ryan Hughes (pictured) says the fund’s recent progress is unlikely to provide much comfort for investors who have been trapped for over a year and still have no clear timetable as to when they might get out.
Volatility due to the coronavirus and proposed changes on notice periods from the Financial Conduct Authority have made it challenging for property managers and authorised corporate directors to feel confident enough to re-open, Hughes says. But at this point he suspects many investors would rather cut their losses and get out of limbo.
“I think if you asked most investors a year ago, ‘Would you accept a little bit higher capital losses to be able to access your money sooner than 12 months?’ I imagine quite a lot of them would say yes”.
M&G Property Portfolio’s high concentration in retail assets is one of the reasons why it has been slower to offload assets.
At the time of the fund’s suspension, it held 40% in retail properties, the majority of which was held in warehouses (21.5%), followed by shopping centres (8.2%) and designer outlets (5.1%).
See also: Retail de-rating could compound problems for UK property funds
While 2019 was a difficult year for the UK high street, that environment has become “considerably more challenging” during the Covid crisis thanks to multiple lockdowns and a major shift to online shopping, says Tilney managing director Jason Hollands.
The fact cash levels are only at 15%, from 5% a year ago, means the disposal process “remains a work in progress,” Hollands says.
M&G anticipates cash could hit 23%
An M&G spokesperson said mangers Fiona Rowley, who exited the business in June, and Justin Upton had been reducing the fund’s exposure to the retail sector before and during the suspension.
Of the £308.4m worth of assets that have been sold since the fund froze, almost 60% have been retail assets.
In the most recent update M&G said a further 10 assets, valued at £174.2m, are either under offer or have exchanged. If these deals were to complete, this would hike the fund’s cash position to 22.8% though the fund group added there is no guarantee they will.
Unfrozen property funds face wave of redemptions
But Fairview Investing consultant Ben Yearsley thinks the property giant will need higher cash levels than that, possibly as high as 30%, in order to cope with the expected tide of redemptions, meaning investors will remain trapped in the fund for longer.
Rival property funds that have re-opened over the last few months have been met by heavy outflows.
The £2.9bn L&G UK Property fund saw £17.9m fly out the door in the weeks after re-opening its doors on 13 October, according to data from Morningstar, while the LF Canada Life UK Property fund saw net outflows spike from £2.3m after unfreezing on 8 October to £9m in November.
The Threadneedle UK Paif, which reopened on 17 September, has had the worst reception, with investors yanking £68.5m in September and withdrawing a further £49.4m in October and £74.1m in November, taking assets down to £817.4m.
The Royal London Property fund has bucked this trend, reporting £393k in net inflows for October, but with just £385.5m in assets it is one fifth of the size of M&G’s property fund.
M&G property fund could be punished more severely for lengthy suspension
Yearsley reckons the chilly reception from investors explains why some property managers have been reticent to re-open despite having similar cash levels to funds that have re-opened.
“They can see how much money’s come out,” Yearsley says. “So, they’ve probably had to now reassess how much cash they need in the portfolio.”
When the M&G property fund finally re-opens Yearsley anticipates it being hit by higher redemptions than rivals L&G and Columbia Threadneedle because “investors will be more pissed off” due to the longer suspension time.
“You’ll punish managers you’re more annoyed with so realistically more money will come out of this relative to the others,” he says. “Therefore, they’re probably going to have to be super cautious and probably aim for closer to 30% cash rather than 20-25%”.
Since the suspension M&G has waived 30% of the fund’s annual charges, making it one of the few active property funds to offer a discount while being shuttered.
See also: £5bn worth of UK property funds remain suspended despite clarity on valuations
Outlook for commercial property remains challenging
Finding willing buyers for UK property assets will continue to be a struggle on the other side of 2020, Hollands says.
“Clearly UK commercial property faces significant headwinds with the collapse of a number of retailers and hospitality chains and the likely downsizing of office floors space by other businesses who may choose to adopt a more flexible combination of home and office based working,” he says.”In the near term, occupancy rates and rental growth are going to remain challenging.”
While Willis Owen head of personal investing Adrian Lowcock thinks there are some opportunities in areas like specialist retail, logistics and infrastructure he agrees that “overall the asset class is in for some challenging times”.
“The retail sector is likely to suffer significantly in the first half of the year as we have already seen some high profile collapses and there are likely plenty to follow as the winter progresses and various forms of lockdowns continue,” Lowcock says.
“The office space is less clear for 2021 as much is dependent on the speed of the economic recovery and how extensive companies home working plans will be and how quickly they will be implemented.”
