With the recent press announcement regarding the suspension of M&G’s Property Fund, we thought our clients would find it beneficial if we explain the thought process behind their decision. Whilst, at the same time, provide a reminder of some of the benefits – and risks of holding property in a portfolio.
Many of our clients hold a degree of commercial property in their investment or pension portfolios. The benefits of holding property are to obtain a steady income stream from rental income, whilst hoping for capital appreciation from the underlying assets over the long term. Owning a property also offers a degree of diversification against other asset classes such as shares and bonds.
The risk that comes with a property fund?
As with all investments your capital is at risk as valuations can fall as well as rise. Property (especially if you hold the physical asset) is a relatively illiquid asset as it can often take a few months to sell a building.
You can gain exposure to commercial property several ways, the most common being via either:
- Open-ended ‘Bricks & Mortar’ Property Funds: which as the name suggests, typically you own a portfolio of physical property, such as shopping centres, offices, and warehouse/distribution centres.
- Funds that invest in the shares of Property Companies (e.g. companies such as Hammerson, British Land) or the UK, International Property Companies or Real Estate Investment Trusts, also known as REITs.
The former tend to be less volatile in terms of price fluctuations, and as a rule, tend to be fairly steady. As a result, these are more susceptible to temporary suspensions in times of market stress, such as we saw during the financial crisis in 2008, or the wake of the Brexit Referendum in 2016.
Many property funds suffered temporary suspensions at these times for several months, to allow the fund managers time to sell the property to meet redemption requests from investors.
The latter tend to react much more quickly to market sentiment, in terms of their pricing and are therefore more volatile. But rarely – if ever – should suffer suspensions as their underlying investments, being property shares are much more liquid and realisable.
What about M&G?
In recent months, continued Brexit-related uncertainty and ongoing structural shifts in the UK retail sector have prompted unusually high outflows from the M&G Feeder of Property Portfolio fund for retail investors. This has impacted the manager’s ability to sell commercial property, so they have temporarily suspended dealing in the interests of protecting customers.
The assets owned by the M&G Feeder of Property Portfolio, such as office buildings and shopping centres, are held for the long term and take time to buy and sell, therefore, making it difficult to immediately meet sudden and sustained levels of redemptions.
Suspending the funds at this time will allow the fund manager time to restore the cash levels by selling assets in an orderly manner and preserve value for investors.
While the fund is suspended investors will not be able to put any money into or take money out of the fund.
Will any other property funds be affected?
Whilst no other ‘Bricks & Mortar’ Funds have been suspended, it is, of course, possible that others may follow in the coming weeks and months, depending on market sentiment (to Brexit, etc) and the level of redemption requests.
It is, however, worth remembering that investments should be held for the long term and any short-term issues (as in 2008 and 2016) tend to get ironed out over time.
If you have any concerns or would simply like to talk through the wider picture, please contact your usual adviser who will be happy to help.
Are you concerned about your property portfolio? Let us know by adding a comment below.