Ryan Hughes, head of investment partnerships at AJ Bell, and Ben Yearsley, director at Fairview Investing, said M&G’s suspension and closure of the property fund, which follows the fate of several others, is likely a death knell for the sector.
M&G suspends open-ended UK property fund ahead of closure
Hughes, however, explained the “fatal blow” came when the FCA started looking at the suitability of daily dealings for illiquid funds.
“From that point forwards, the funds essentially became uninvestable because the regulatory risk of serious change became much greater,” he argued. “That made it almost impossible for new investment into property funds, and therefore they were only likely shrinking going forwards.”
Yearsley agreed, adding that the “mismatch and misallocation of capital” – with around 30% in cash – meant it was just not “feasible to continue in the long run”.
Ben Seager-Scott, head of multi-asset funds at Evelyn Partners, echoed Yearsley and Hughes’ views, arguing there has been a “sense of the inevitable” for both the M&G property fund and similar ‘bricks and mortar’ funds more generally, “given the known challenges of the liquidity mismatch for daily-trading funds”.
But Oliver Creasey, head of property research at Quilter Cheviot, disagreed, noting M&G’s suspension and closure of the fund was “not necessarily” terminal for the sector, rather a sign it is not in “good health”.
He explained: “There are still a handful of funds out there big enough to be considered sustainable, but it is possible that they may not want to carry on in what is proving to be a challenging operating environment. The sector can continue, although whether it will or not is a big, unanswered question. The longer the environment continues to be difficult, the more likely that more funds throw in the towel.”
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All four have argued there should be a much wider use of hybrid models or alternative vehicles – such as LTAFs or REITs – although they recognised there is currently limited demand for both.
Yearsley and Hughes pointed to the former BMO Property & Income fund, now managed by Columbia Threadneedle, as well as TIME Investments’ Social Long Income fund as good examples of how to use a hybrid structure for property funds.
Creasey said: “We are surprised that more operators have not gone down the hybrid route, but are equally surprised that more investors are not interested – the Columbia Threadneedle fund is nearly 20 years old, but only around £350m in size.”
Yearsley echoed this, saying it is “mystifying” the model is not more widely used.
On the alternative vehicles front, Creasey noted LTAFs have not “really gained traction yet”, as some unanswered questions remain on whether they could be held in an ISA.
However, Seager-Scott noted most retail investors will “value the more frequent liquidity”, which LTAFs do not offer, compared to their institutional counterparts. Yearsley also noted platforms do not offer monthly-dealing funds either, making it more difficult to access them.
Creasey added REITs could be a viable alternative, in general, although he warned that investors would be trading liquidity for higher volatility, “as the share price can move away from the NAV in either direction”.
AJ Bell’s Hughes said: “I have heard suggestions that managers were looking to try and convert their open-ended funds into REITs but that was not potentially allowable under HMRC rules, and given that none have done so, despite it being the obvious solution, points to that probably being the case.”
He added that REITs are “useable” on some platforms, or alternatively funds of REITs could be an option to gain property exposure, but also noted some passive options could be viable following so many open-ended property funds closures.
“However, it is worth remembering that there always has to be a trade off for accessing illiquid assets. In most cases, this means the listed property asset trades at below NAV in times of stress, as we are seeing right now. Some of the larger REITs are trading at a 25-50% discount and investors will need to factor that into their thinking when assessing if these assets are investable.”
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Yearsley noted that REITs will be able to give investors “property returns” over the long term, but they will need to factor in the “equity-like volatility” in the short term.
However, as Seager-Scott noted, investors have been “moving away” from the ‘bricks and mortar’ sector, and Investment Week asked where else can they put their money if they cannot access direct funds.
According to Hughes, three years ago the direct buy-to-let market was likely the “biggest competitor” for client money, although the “attractiveness has waned considerably over the past couple of years”.
Currently, he argued investors can get “mid-single-digit returns in fixed income or even some cash products, and compare quite well to the income yields available from property”.
Hughes added he does not envisage investors moving between property funds especially due to the “painful” cost of trading: “the bid/ask spread on the M&G Property fund (prior to closure) was 5.75%”, he noted.
