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One year on from the commercial property funds saga

As the FCA berates fund groups for their handling of the wave of redemptions in property funds following the Brexit vote, Money Marketing talks to managers about what next for the commercial property sector

Brexit continues to hover above the commercial property sector as fund managers adjust to a new normal after last year’s redemptions saga.

The FCA has said fund groups were ill prepared for the fallout of the Brexit vote when it came to assessing the value of their property portfolios.

But it said wealth managers and advisers were well prepared for the suspensions, with clients seeing little impact.

Money Marketing has talked to some of the property fund mangers caught up in the redemptions wave in the wake of the EU referendum, which led to nearly £2bn in outflows from property assets in the last six months of 2016. But what has changed since last year?

Between May and July 2016 nine large commercial property funds either imposed temporary gates on exiting investors or changed their pricing to reflect the uncertainty around property valuations during the EU referendum.

FCA says property funds were ill-prepared for Brexit fallout (and praises advisers)

Since then, experts have highlighted a number of structural issues for property funds which hold illiquid assets that are difficult to sell quickly while trading daily.

This, coupled with similar liquidity issues seen in bond funds, has sparked both the FCA and the Bank of England to confront the problem and consult the industry on the remedies to take.

M&G fund manager Fiona Rowley, who manages the firm’s £3.8bn Property Portfolio fund, says property prices have recovered since Brexit and she sees the continued uncertainty around it as an opportunity rather than a threat.

She says the occupier market, including City offices, has remained resilient despite worries Brexit might lead to a UK firm exodus.

She expects UK commercial property to generate total returns of around 5.5 per cent per year, with 4.9 per cent growth forecast to come through rental income.

Kames Capital director of property investment David Wise agrees most property valuations have been “remarkably strong” post-Brexit but he expects central London property prices to come under pressure in the medium term.

These properties are more cyclical compared with better value in other regions.

He says: “Flows into our fund were similar to the pre-Brexit time, and third quarter aside, they have been mildly positive. We also managed to outperform despite holding central London properties.”

Over a one-year period, the Kames Property Income fund has returned 18.3 per cent versus 4.8 per cent for the IA Property sector, according to FE. Fund managers seem to agree industrial property as well as the office sector are a better bet than retail property, which remains under pressure.

BMO’s Guy Glover, who manages the £380m F&C UK Property fund, says high- street retailers have been challenged by the rise in e-commerce and sees longer-term value in the industrial space and offices in the regions.

BMO Global Asset Management manages £5bn in property investments overall.

Glover, who applied price adjustments to the fund instead of gating it last year, says: “We have a higher level of property occupancy compared to other funds.

“It could seem boring but we are long-term and we may be growing slightly less than others. Consumers shouldn’t buy this type of funds for performance or use it as a proxy for corporate bonds but only if it is right for them.”

In 2016, property funds lost just over £2bn, according to the Investment Association, compared with £400m in 2008, when many commercial property funds gated at the start of the financial crisis.

Columbia Threadneedle Investments managing director for property Don Jordison, who manages its £1.2bn property fund, says he very rarely is overweight in a particular sector and keeps the fund diversified.

He says: “What has changed since last year is the hysteria and panic caused by the redemption wave, which then disappeared quite quickly. People looked quite emb-arrassed about what actually happened afterwards after predicting a massive fall in values.”

Most property funds have learned the lessons of holding more cash in case of withdrawals. Many have upped their liquid holdings to over 20 per cent, compared to around 10-15 per cent around a year ago.

In May, Hargreaves Lansdown crunched the numbers for Money Marketing showing UK commercial property funds are making £30m a year in charges on their cash holdings.

The BoE warns holding more cash buffer as a proportion of the fund’s total assets is a double-edged sword, as funds who are using their cash buffer first for withdrawals increase the incentive for investors to redeem immediately before the cash buffer runs out.

The M&G Property Portfolio fund held 16.2 per cent in cash as at the end of May and holds a number of liquid assets that could be sold relatively quickly.

Jordison says the current cash buffer in the Columbia Treadneedle fund is 27 per cent to reflect other “risk events”. He says: “The FCA has identified the fund suspension was a rational action, though regrettable. I wouldn’t have done anything different. We had 22 per cent liquidity before anything happened and had £100m prepared to sell quickly.”

Some managers have argued last year professional investors speculated because of the price differences between open-ended and close-ended property funds, which were trading at large discounts.

Wise says this was “highly opportunistic” and would expect the FCA to look at this behaviour in its review of the sector.

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