Comments from the article below were published in Portfolio Adviser on 22nd April 2021. Access their on-line version here or read the full article below.
On the face of it, the figures from the daily traded property funds paint a negative picture for commercial property with outflows of £128 million in January, £314 million in February and a record £589 million in March. IMA figures show that £4bn has been withdrawn from these funds since the Brexit Referendum. At Mayfair Capital, we believe this activity is stimulated more by structural issues with these funds rather than pessimism towards the asset class. In recognition of the shortcomings, the FCA is proposing to exclude ISA investors from investing whilst also introducing a 180 day redemption notice period. These impending measures alone have stimulated selling activity.
The changes are a recognition that the design of the daily traded funds is fundamentally flawed. There is a mismatch between the illiquidity of the underlying asset within a daily pricing ‘wrapper’. When markets move in response to shocks (Brexit, Covid etc) investors anticipate the fall in commercial values and attempt to exit at what is effectively an historic price. The resultant rush for the exit inevitably leads to fund closures in order to protect remaining investors. Some daily traded funds have been closed (or gated in the industry parlance) for over 12 months now, implying that the demand for redemptions remains very high requiring assets to be sold to raise cash. A further flaw with this approach to liquidity management is that managers sell their best and most liquid assets first, leaving a rump of more secondary property, impliedly even less liquid and prone to valuation weakness.
M&G Investments have just announced that it is opening its daily traded fund after 16 months from closure. After selling activity, the fund has 33% in cash implying that this will be sufficient to meet redemption requests.
At Mayfair Capital, we welcome the FCA’s proposals and it remains to be seen how popular the funds will be in their new format. Retail investors may feel that real estate investment trusts are a more attractive means of gaining exposure to commercial property if they are willing to accept the risk of higher volatility in return for instant liquidity. UK REITS, particularly those with a low or zero retail exposure, have performed well this year with yields of 3% to 4% available. However, given that they are investment trusts, they trade at a premium or a discount, whereas daily traded funds are priced on a net asset value basis in normal conditions.
The institutional market, as represented by the funds in the MSCI/ Association of Real Estate Fund’s Index, has avoided these problems. They are generally owned by institutional investors with private investors all but absent. The institutional funds have seen outflows but the redemption provisions, in most cases, such as those incorporated in Mayfair Capital’s Property Income Trust for Charities, are fit for purpose.
In conclusion, the selling activity in the daily traded funds should not be interpreted as a malaise in the commercial property sector. The recent experience of retail investors means that their appeal is diminished and they are set to be a less relevant vehicle in the future. In the meantime, prospects are improving for returns from property as the economy moves out of lockdown and investor confidence returns.
James Thornton - Non-Executive Chairman