M&G temporarily pulls down the shutters on its commercial property fund
TPO’s Becky Bonner was on the BBC Money Box programme recently, speaking to Paul Lewis about the temporary suspension of M&G’s property fund.
Becky Bonner, Senior Adviser
On BBC Money Box, I discussed that M&G had announced it was freezing withdrawals from its £2.5bn Property Portfolio fund which is invested into 91 UK commercial properties – including shopping centres and other retail properties, as well as industrial and office buildings.
According to reports, total withdrawals over the last 12 months of nearly £1bn, driven by concerns over the future value of retail real estate, prompted this temporary suspension.
M&G stated that it has made this decision in order to allow it to sell assets, if necessary, in an orderly manner both to meet demand for cash and to protect remaining investors.
While it is undoubtedly disconcerting and disruptive to investors, it serves as a reminder that although property funds are traded daily, and therefore perceived as ‘liquid’, the underlying assets are illiquid and it takes time to realise cash where there is unusually high demand. This action is not unprecedented – or expected to be permanent.
In 2016, following the Brexit referendum a number of property funds suspended withdrawals after the market was spooked by fears of a collapse in UK real estate values – but reopened within months.
In the wake of the 2016 events, the industry regulator, the Financial Conduct Authority (FCA) reviewed the action of funds and issued guidance which encourages this sort of move. In fact, it has also announced that it will be introducing a new rule from September 2020, requiring property funds to suspend dealing if there is ‘material uncertainty’ over the value of 20% of their assets.
Following the M&G move, investors have been rushing to withdraw their money from other property funds, which could lead to further fund suspensions. But investors are being urged not to panic and make knee-jerk decisions.
At TPO, we do like the asset class, however we can only recommend it for clients who are going to buy and hold for the long term. For this reason, it is not in our asset allocation and core models which are normally rebalanced every six months.
Commercial property is still an interesting asset class and in the right circumstances can be useful to further diversify risk. Anyone investing in commercial property should be aware that trading suspensions may occur and decide whether they are comfortable with this possibility before investing.