Not for the first time, investors are locked into property funds, risking contagion across the sector.
Commenting on the suspension of the M&G Property Portfolio fund, Rebecca O’Keeffe, Head of Investment, interactive investor, says: “M&G have shut their doors to redemptions yet again, raising the risk of contagion across the property sector and yet again highlighting the issue of liquidity and the structure of funds.
“Several property funds were closed to redemptions in July 2016 after mass redemptions and the blame was placed at the door of Brexit uncertainty following the referendum. Three and a half years on, the same reason is being blamed for the closure of M&G Property Portfolio for the second time. The fund was closed on July 5th 2016 and reopened four months later on November 4th 2016. There is a very real prospect that the M&G fund may not be the only property fund to close this time around too.
“Property funds with exposure to bricks and mortar retailers are being hit especially hard as the shift to online shopping has seen a continued deterioration of the high street. However, there is a wider issue around liquidity in general that has been propelled into sharp focus following on from the Woodford debacle.
“The perils associated with holding property within an open-ended fund structure rather than through a closed-ended trust are well known, so it is disappointing that the industry still hasn't changed its policy of holding such lumpy and illiquid assets in open-ended funds. It is quite frankly crazy to put these illiquid assets like these into an open-ended fund. You are potentially asking to be a forced seller in stressed markets, which is very bad news for investors.
“That is not to say that property trusts will be immune to any fallout in the property sector as discounts are likely to widen - but at least existing investors should be able to access their money if they want to. For new investors, commercial property may eventually become a good asset to buy if the fallout from M&G’s closure provides an entry point to UK commercial property ITs at attractive discounts.
“From 30 September 2020, new FCA rules come into effect on funds which are illiquid – including UK property funds. These new rules will require that investors are provided with “clear and prominent information on liquidity risks and the circumstances in which access to their funds may be restricted”. That presupposes that any investors are left in property funds and that they haven’t followed the saying of “Fool me once, shame on you. Fool me twice, shame on me.”
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