M&G has bolted the door, but is any property fund safe?

When M&G shocked small investors last week by blocking withdrawals from its high-profile £2.5bn property fund, the question ricocheting around the investment industry was: who next?

After the 2016 referendum, the property dominoes fell quickly. Standard Life’s £2.9bn fund closed its doors first, to fend off a rush of withdrawals. The next day M&G and Aviva followed suit. Henderson and Columbia Threadneedle were next, and before long £35bn in savers’ money was locked away.

Is a repeat on the cards? The crucial question is the level of cash the funds hold. M&G had to close its doors this week after months of relentless withdrawals – totalling nearly £1bn in the past year – left its cash levels critically low. The fund managers simply could not sell buildings fast enough to give savers their money back.

Darius McDermott of Chelsea Financial Services said: “One suspension can have a domino effect, as other investors worry about not being able to access their money.”

So what are cash levels looking like at the major UK property funds?

Threadneedle’s £1.2bn fund appears the most vulnerable. Data from Morningstar shows that at the end of October, just 6.3% of the fund was in cash. M&G’s cash levels had fallen below 5% – though following more recent asset sales, the fund groups have disclosed slightly different cash positions.

Threadneedle’s fund bears alarming similarities to M&G’s. As with M&G, some of its biggest holdings are retail parks – including ones in Reading and Cardiff. Like M&G, it has performed badly – losing 6% of investors’ money over the past year. Like M&G, it has suffered substantial outflows – totalling £338m over the 12 months to end of October.

Columbia Threadneedle immediately tried to quell fears: “The fund’s cash levels are maintained within a liquidity corridor of 5-15% and year-to-date we have comfortably met all client redemption requests. Furthermore, there have been a number of days more recently where we have witnessed net investor inflows.”

It says its current cash position has recovered to 10%, and that it has a diverse portfolio of 170 properties with 1,300 underlying tenancies.

Other major property funds appear to be in a safer position. Aberdeen Standard said its two major funds had cash buffers of 17.5% and 14.6% respectively. The biggest UK property fund, run by L&G and valued at about £3.1bn, has a high cash element – 25.2% – while Aviva is at 30%. Unless there is an extraordinary dash for the exit, these are very comfortable levels. But high liquidity poses a different dilemma: how can fund managers generate returns if they have to keep large amounts of money on standby, earning nothing in interest? Prior to the M&G closure, one financial adviser called 30% cash levels “a disgrace”, arguing that fund management groups cannot not justify high fees when they are leaving much of their money on deposit.

The reality is that the rash of closures in 2016 was a response to a specific event, and most reopened within a few months. This time, the threat is existential. British retail parks have been among the worst-performing real estate assets in Europe, as numbers of shoppers decline and the switch to online buying sees rents fall. Brexit has made things even worse, with foreign investors staying on the sidelines until there is more clarity about Britain’s future.

Retail analysts say M&G’s fall was inevitable. “M&G has an extensive retail property fund, but the bulk of the stock is in more ‘challenged’ high streets,” said Jonathan de Mello of Harper Dennis Hobbs, “and these have been hit massively by the large volume of CVAs [company voluntary arrangements, a procedure that allows retailers to slash their rents in order to avoid collapse] and administrations we have seen over the past year, as well as practically every other retailer seeking to reduce rents.

“M&G’s suspension is a desperate measure, but will only help in the very short term. In fact, it may be worse overall, as it will draw significant adverse attention to the quality of the stock, and it is very likely that investors will exit at an even more rapid rate once trading resumes.

“M&G’s issues are the first sign that property funds are materially starting to feel the pain that retailers have been feeling for years. It is pain that can only get worse.”

Those who think the issue of collapsing retail asset values doesn’t affect them might want to think again. The typical UK pension fund holds around 6-8% of savers’ money in property, and at some the share is much higher.

The bloodbath in retail will hit millions more than the thousands of holders of M&G Property Portfolio.

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