Tuesday 4 February 2020 5:43 am

The big freeze: Investors feel the chill in M&G's frozen property fund

December and January have been cold dark months, especially for investors whose money has been frozen in M&G’s £2.5bn property fund since the beginning of winter.

The asset management company felt compelled to suspend trading on its Property Portfolio fund on 4 December, due to the high volume of withdrawals by investors in the preceding months. M&G blamed these redemptions on Brexit uncertainty and the problems facing the retail sector that have affected commercial property.

Because property is an illiquid asset (meaning that it can’t be sold quickly, unlike shares or bonds), there were fears that the fund would not have enough cash to meet the rising level of redemptions.

The suspension means that investors can neither buy nor sell units in the fund. For people who had thousands of pounds invested, this is a major concern, as they no longer have ready access to their money, nor any idea when this will change.

Last week, M&G announced that the big freeze would continue for the foreseeable future, while it sells some of its holdings in order to raise cash.

“Since suspending the fund, we’ve been encouraged by the support of many investors, who understand our decision to give the managers room and time to complete disposals from the portfolio at fair prices,” said Jack Daniels, chief investment officer of M&G, in a statement on the suspension. “While customers want ready access to their investments, it’s also important that their long-term interests are protected.”

So far, the fund has completed on the sale of £70.4m of assets, while a further £172m is either under offer or with solicitors. The fund currently holds around 4.8 per cent of its value in cash. Given this, how much longer is the fund likely to remain frozen?

“When a property fund is suspended it takes time for it to be restructured, especially when it involves illiquid assets such as property,” says Adrian Lowcock, head of personal investing at investment platform Willis Owen. 

“M&G are going to want to make sure that the fund has a sufficient cash buffer so that they can meet any redemptions when it reopens. At present there are still further disposals needed before they are in a strong position.”

This isn’t the first time that M&G has had to suspend this fund. It froze the fund for four months following the Brexit referendum in 2016, along with many other asset managers after property funds suffered heavy losses. 

Since then, the asset class has remained out of favour with investors. Last year, a record £2.2bn was withdrawn from funds in the UK property sector, according to transaction network Calastone. 

Get the news as it happens by following City A.M. on Twitter

The suspension, and the record rate of redemptions from property funds, has raised concerns about these investment vehicles. Part of the problem is that M&G’s Property Portfolio, and others like it, are structured as open-ended funds. This means that investors buy shares directly from the fund itself, rather than from existing shareholders. And because of daily dealing, the fund is required to be able to redeem the value of the shares at any point, either through cash reserves or asset sales. 

“Open-ended property funds can provide stable long-term income and returns, but due to the illiquid nature of the assets there have been infrequent instances when the funds have had to suspend temporarily to preserve value,” says Paul Richards, managing director of the Association of Real Estate Funds. “For some strategies, it may be appropriate to move to less frequent dealing points, potentially using notice periods.”

Considering the problems with the M&G fund, and the current unpopularity of the sector, should investors avoid property altogether? Not necessarily.

“Property is still a great investment — you just need to do it correctly,” says Mervyn Howard, executive chairman of Apache Capital.

“Co-investment and closed-end funds are two vehicles that are better fits, as they are not so exposed to real estate’s illiquid character. Against the backdrop of global macro uncertainty, real estate is still a solid play that investors will want exposure to.”  

While the M&G Property Portfolio is likely to remain shut as the days grow longer, many other funds have avoided suspension. And once Brexit uncertainty is out of the way, the retail sector may pick up, leading to a recovery for commercial property funds. However, that will provide little warmth for investors whose money is currently frozen with M&G.

Sign up to City A.M.’s Midday Update newsletter, delivered to your inbox every lunchtime

Main image credit: Getty

Share:
Tags: