Yesterday, M&G Investments joined property fund providers Aviva and Standard Life in announcing a temporary suspension of trading in their UK commercial property fund held in our portfolios.
The announcement comes as a result of a high level of investor redemptions following market uncertainty since the outcome of the European Union referendum. The M&G Fund has experienced a turbulent few weeks in a challenging market environment, causing managers to switch pricing of the fund three times in three weeks. According to the fund manager, a temporary suspension of trading will allow them to raise cash levels and make any asset disposals needed at reasonable values.
Commercial property funds have come under pressure from regulators to review the risk to investors of continuing trading given market volatility. The suspension is expected to protect investors by preventing any further withdrawals at the current time, allowing markets to stabilise somewhat before resuming trading.
– Don’t panic- selling takes time
Anyone who has sold property before will realise that selling takes time; property funds will need time to sell commercial property to meet withdrawals. The suspension period will be used to start the process of selling off the necessary assets to increase the fund’s cash position which has been depleted by redemptions. It is key that the property is sold at reasonable prices and that the fund is not forced into fire sales of properties to raise cash. Despite the less-liquid nature of property funds demonstrated by the suspension of trading, the M&G fund has been a solid performer in portfolios over the past 5 years and we still feel confident in its ability to weather the storm. It is the UK’s biggest commercial property fund, with a broadly diversified portfolio of direct commercial property valued at £4.4bn with no borrowings.
– Why has there been a rush to sell?
The rush to sell out of property funds comes as the turmoil and market uncertainty created by the Brexit vote has negatively affected the outlook for UK Property, an area where sales are driven predominantly by market sentiment. This uncertainty has panicked nervous investors who are trying to flee from more illiquid assets, compounding the problem for fund managers.
– Is this a repeat of 2008?
On the same day as M&G, Aviva halted its £1.8bn property trust, a day after Standard Life blocked access to its £2.9bn fund. The only other time Standard Life has suspended trading of the fund was back in 2008, whereas Aviva and M&G have never before done so. Although this may have panicked some investors suggesting that this could be the start of recession, this dip in UK property is widely regarded by analysts as being a temporary blip rather than a long term setback for commercial property.
Back in 2008, the problem with UK property was that prices had been inflated by too much debt and speculation. These two features are now largely absent today, and the majority of selling is coming from panicked institutional sellers. The economic implications of Brexit will take months to realise, and as we have seen over the weeks since the vote, markets are largely trading from noise rather than fundamentals.
– What impact will this have on my portfolio?
The suspension of trading is due to be reviewed in 28 days. Until trading resumes, our investment team will be reviewing the state of the fund on a regular basis and will keep you updated as to when trading is expected to resume. We will also provide you with updates where possible on how the fund is using its time to increase its cash position and restructure the fund. In the meantime, it is important to remember that our portfolios are well structured and diversified both in terms of asset classes and regions. Where the M&G property fund has fallen back in recent weeks, portfolios have at the same time benefited from a strengthening of the US dollar, and increased returns from US exposure within the portfolio. This high level of diversification places us in a good position going forward.Should you have any questions or concerns over the recent news, please do not hesitate to contact a member of our investment team in the office on 01858 898023.
Risk warnings: Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.