Investors pulled almost £3bn out of UK property funds over the past year, highlighting the toll that extended Brexit uncertainty and high street gloom have had on the sector.
Data prepared by Morningstar shows that £2.8bn was taken from 15 open-ended commercial property funds that offer daily liquidity to investors, putting pressure on the cash buffers used to cover customer withdrawals.
One of the UK’s largest property funds, M&G, was suspended earlier this week after almost £1bn was withdrawn by investors over the past year. The Aberdeen UK Property Fund was the second-worst performer and suffered about £773m in cash withdrawals.
However, cash levels in the M&G fund slumped to only 5% before it was forced to suspend the fund. The Aberdeen fund’s cash levels stood at 10.9% in October but have since been raised to 12.7%.
M&G’s £2.5bn fund had a relatively high exposure to the troubled retail property sector, accounting for about 37% of the portfolio in October, according to the ratings agency Fitch. It meant the fund was more sensitive to a drop in the value of those properties after a review by the property consultants Knight Frank last month.
The Aberdeen UK Property Fund was the only fund with a higher exposure, at 43%.
However, M&G’s problem could end up snowballing if the suspension ends up spooking other investors into pulling money from other property funds, Fitch warned. “The suspension of redemptions in the M&G Property Portfolio could precipitate outflows from other commercial real estate funds as investors seek to redeem holdings before other funds potentially implement extraordinary liquidity control mechanisms.”
Asset managers can try to avoid gating their funds by introducing new measures such as queues, which would allow customers to make redemptions in a more orderly way, but that kind of structural change has not been widely adopted.
“Without such measures, more UK commercial real estate funds may have to impose extraordinary liquidity measures, particularly given the backdrop of the Brexit process and the negative outlook for the commercial real estate sector,” Fitch said.