Investors in one of the UK’s largest commercial property funds have been told that they cannot - for now - get at their money following the fund’s suspension.
The M&G Property Portfolio joins the ranks of property funds which have in recent years been forced to suspend dealing - or apply painful adjustments to pricing - to cope with sustain periods of withdrawals.
Following the suspension, no new investments or withdrawals will be allowed although income payments to fundholders will continue. It is a worrying time for investors in the fund, who must now wait until M&G can reconfigure the underlying investments - including selling assets - to free up cash.
The episode holds a number of important lessons.
Liquidity risk matters
‘Liquidity’ expresses how easy it is to get the value from an asset by selling it. Cash is the ultimate liquid asset because you can get the value from it instantly.
In the investing context, listed shares in big companies are considered highly liquid because there’s almost always a ready buyer if you want to sell. Illiquid assets, on other hand, are harder to sell - it may take time or additional cost and if you need to sell under time pressure then the price you’ll get is likely to suffer.
Commercial property - large buildings and land - is illiquid because it is not easy to sell. The process is legally complex and the numbers of buyers few. A fund investing directly in a commercial property by owning part or all of it cannot release the value of that property straightaway.
That’s a problem if the fund suffers prolonged periods when more investors want to sell out of the fund than buy in. In more normal times those wanting to sell can be matched against new investors wanting to buy in so there is no need to sell assets. Even if there are a few more sellers than buyers, a proportion of the fund is held in cash to meet redemptions. But if selling is sustained and heavy, the fund may have to sell real assets.
It’s why some think the traditional fund structure - sometimes described as ‘open-ended’ - is not suited to holding illiquid assets.
Not all commercial property is the same
The M&G Property Portfolio is invested heavily in large shopping centres including the Arndale Centre in Manchester and Fremlin Walk, an open-air precinct in Maidstone, Kent. The success of these properties is tied up with the success of the UK retailer clients which populate them, and those retailers have been suffering both from the long-term trend towards online shopping but also the short-term uncertainty of Brexit which is putting off business investment and consumer spending.
As such, investors have had plenty of excuses to shun the M&G fund. Other commercial property may not hold such a weighting to retail space, and instead buy assets like warehouses or offices. Many commercial property funds have also seen outflows, but not to the same scale.
There are other ways to access commercial property
It is possible to gain exposure to commercial property in a way that means your fund is not invested directly in bricks and mortar, and therefore can remain more liquid. Real estate investment trusts - or REITs - are themselves listed companies which invest in property. Investors can buy the shares in these REITs and sell them on the stock market. If lots of investors wish to sell at the same time the price will go down, of course, but this does not have to force the sale of actual properties.
There is a yet more diversified way to access the asset. Some stock market indices group REITs from across the world together, and investors can buy funds which then track these indices. This is the case with the iShares Global Property Securities Equity Fund, which features on our Select 50 list of favourite funds.
Investors in it are investing in around 500 individual REITs operating across the world, with each REIT holding numerous property assets, so the risk to any one sector of the economy or region is diminished.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to sell this investment when you want to. There may be a delay in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer's opinion rather than fact. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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