UK commercial property funds are making £30m a year in charges on their cash holdings as they defend against another wave of redemptions.
Last year nine large commercial property funds either imposed temporary “gates” on exiting investors or changed their funds’ price reflecting the uncertainty around property valuations during the EU referendum period.
Despite re-opening trading in the funds as property market proved less volatile a few months after the vote, the UK political scene remains uncertain for a number of fund managers who have upped their cash holdings to higher than average levels.
Firms have increased cash to over 20 per cent, compared to around 10-15 per cent around a year ago.
Considering the clean retail share class of these funds, Hargreaves Lansdown estimates firms are potentially collecting around £30m in total a year on their larger cash exposures.
For example, the £2.6bn Legal & General UK Property fund holds 26.1 per cent in cash, while the £1.3bn Aviva Investors Property Trust holds 21.5 per cent. The £2bn Aberdeen UK Property fund also has more than a fifth of its assets in cash and equivalents at 21 per cent.
Aviva declined to comment on how much it was collecting off the cash holding.
However, a spokesman says: “We have deliberately held a higher cash weighting since the resumption of dealing last December within [the fund] to cope with any further potential volatility in the market.
“This is not out of line with the vast majority of our peer group funds.”
The spokesman says in the medium term the fund manager will reduce the cash weighting and target a total liquidity holding of around 15 per cent and possibly including real estate investment trust holdings.
Despite cash protecting the fund in market falls or acting as a diversifier, Wellian Investment Solutions chief investment officer Richard Philbin argues that it would be fairer for clients to pay less in charges given the larger cash holdings of these funds.
Philbin says: “A fund management company could ‘average’ the cash held on account over a year for instance and use the number to reduce costs rather than refund directly. It isn’t cheap buying and selling buildings; it could possibly be used to reduce the ongoing charges figure.”
He also highlights the need for regulatory change in the structure of property funds, following the FCA’s decision to conduct a review of the funds in light of the redemptions.
The regulator issued guidance on how fund managers should deal with increased redemptions last July, saying that “exceptional circumstances” may justify a suspension but the regulator should be informed first.
While Signpost Financial Planning director Nigel McTear says he does use property for some clients, he sticks to REITS to manage liquidity and downside risk.
“If you want an expensive cash fund then brilliant,” he says of managers increasing cash holdings in their property funds.
“There’s a lot of hidden nasties in property funds. They have done well when you come off another lockdown in 2009, they bounced back, but now we are going back into a slow and low period, the decent money has been made, and there’s lots of downside risk.”
“The problem is when you get a financial crisis or major event, liquidity comes and goes. They can and have been locked down and clients complain.”