The £4bn M&G Property Portfolio should soon be re-open to investors, according to its manager Fiona Rowley, who says she is nearing a large enough cash weighting to make sure there is adequate underlying liquidity to meet daily dealing requirements. .png)
Speaking to investors, the manager apologised that the fund has yet to re-open following its trading suspension, but says she is unwilling to compromise investor value to do so.
Direct commercial property had been one of the go-to asset classes over recent years as the UK economy entered recovery mode and investors looked for a source of income as bond yields continuously dropped.
Indeed, the average IA Direct Commercial Property fund beat the FTSE All Share and the Barclays Sterling Gilts index by 12 and 25 percentage points, respectively, between 2013 and 2015.
Performance of sector versus indices between 2013 and 2015
Source: FE Analytics
As a result, funds within the IA Property sector witnessed significant inflows – though that trend has reversed significantly in 2016 both before and after the EU referendum.
While money had been coming out of the sector during the months prior to the vote, in the wake of Brexit, most of the top groups were forced to sizeably cut the value of their underlying holdings and suspend trading for the first time since the financial crisis in 2008 due to a liquidity mismatch and to stop further significant outflows.
Some have already re-opened, however there are many that remain suspended.
M&G were one of the first open-ended property funds to suspend trading in the aftermath of the EU referendum result, when investors sold off their ‘bricks and mortor’ holdings en-masse over fears that property prices would plummet.
Performance of index in 2016
Source: FE Analytics
As the graph above shows, the sector plummeted following the vote, but with some coming back from suspension already, trading has begun to tick up in recent weeks, as interest from foreign investors looking to capitalise on the weaker pound has driven demand (and property prices) higher.
Indeed, this week, Henderson announced it would begin daily dealing from next month, following in the footsteps of Columbia Threadneedle and Canada Life, which have already done so.
Others, including Aberdeen and F&C Investments have also made changes, reducing the high penalties they had previously imparted to dissuade investors from selling their holdings.
The immediate impact to the sector was the significant devaluing of sterling, which has plummeted 11.52 per cent so far this year and lost an eye-watering 10.90 per cent in the first few days following the vote on 23 June.
Performance of sterling in 2016
Source: FE Analytics
While this has impacted the price of property in foreign currency terms, house prices (for example) have begun to pull back some of the losses seen over the summer, according to online house seller Rightmove.
The company said the average asking price has risen 0.7 per cent in September, offsetting around a third of the losses suffered since the Brexit vote.
While this cannot be directly applied to commercial property, Rowley says a similar trend has happened in the sector, adding that she remains confident that UK transactions will reach £40bn in the next quarter.
“Interestingly if we don’t exceed £40bn it won’t be to do with a lack of buyers it will be due to a lack of sellers,” she noted, with particular interest coming from foreign investment.
However, M&G remains suspended and at an investor conference last week Rowley said: “I have to stand here today and apologise because we are currently still in suspension so we’re not able to daily deal with our investors and they’re not currently yet able to deal or purchase.”
She says that re-opening the fund remains a priority and that there have been a number of transactions in recent weeks to achieve this goal.
“We’ve completed on nearly £200m of transactions and exchanged on another £53m – so they’re contractual exchanges with the money coming in in September - and we’ve got another £208m in solicitors’ hands,” she said.
“The ones in solicitors’ hands are important, they’re all progressing well and targeted to exchange in September and then complete in October and that would collectively get our cash position to just under 15 per cent.”
“We’re next week doing some more transaction activity – putting more in solicitors hands again with targeted completion in October to get our cash position above 15 per cent which is the figure that we look to as one of the key components to re-opening this fund.”
Performance of fund versus sector in 2016
Source: FE Analytics
Rowley explains that the key for the re-opening of the fund, which currently yields 4.14 per cent, is to make sure that the sales are at decent prices and are of only the property she wants to sell.
While there has been interest in some of the more trophy assets at knock-down prices, she has remained unwilling to offer large discounts on quality assets.
“It’s all about the orderly disposal of our assets,” she said, adding that the fund has sold across all sectors, not just the most highly desirable properties.
“We didn’t want to do fire sales - we didn’t want to destroy investor value and the aggregate of all of that £400m [raised so far] has only been at minus 3 or 4 per cent pre-Brexit pricing.”
“I do think we have the right strategy, we’re nearly getting there and we’re doing it through an orderly disposal.”
She says the fund is selling more of its good secondary assets than its prime assets, meaning the portfolio will be more “risk-off” moving forward.
The portfolio currently has 45 per cent in prime and 55 per cent in good secondary, but she says the switch back to prime is necessary due to the fact there will be “some headwinds and bumps in the road to go through in 2016 and 2017”.