In February, investors pulled more cash from commercial property funds than in any month since 2008, according to figures from the Investment Association. It’s a continuation of a trend – the fourth quarter of 2015 was the slowest for commercial property fund sales in more than two years.
And last week, many of the funds responded – by lowering their prices for anyone selling out. M&G Investments, Henderson Global Investors and Standard Life have all opted to switch their bricks and mortar funds from paying the usual “offer” price, to the lower “bid” or “mid” price.
Around £13bn is held in the funds affected in total, and the move “effectively lowers the price by between 5% and 6.25%”, says Ed Monk in The Daily Telegraph. That reduces the value of existing investors’ holdings, but it does make the funds cheaper to invest in for new buyers.
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The funds in question say that lowering the price is the fairest way to ensure those who sell out of the funds now share in the costs involved in the disposal of the properties underlying the portfolio. Tweaking the pricing in this way ensures that continuing investors won’t suffer from increased transaction costs if assets need to be sold to meet redemptions. If they didn’t make these changes, the funds say, then remaining investors would be forced to pay higher charges.
However, when funds “swing” their prices like this, it’s generally seen as an acknowledgement that they don’t expect to see material inflows in the near future. And if things get really tough, redemptions can be suspended altogether. For example, in the wake of the 2008 financial crisis investors in a number of open-ended commercial property funds were forced to wait for properties to be sold before they could receive their money back.
“Clearly, if every investor wanted their money back tomorrow, that would be impossible. It’s a very illiquid asset class,” Simon Molica at Morningstar Investment Management told the Financial Times. However, both Henderson and M&G say the move in pricing was unrelated to the liquidity or otherwise of their funds, adding that the change was simply a reflection of current flows. Each of the funds holds between 10% and 16% of its assets in cash, and the companies insist there is enough liquidity in them to fund investors who pull out.
The weak performance of property funds is being partly attributed to the EU referendum – a pro-Brexit vote could hit the property market in London and the southeast particularly hard, if international companies decide to move out of London. “It just makes people think,” as Ben Yearsley of Wealth Club told FT Adviser.
Investors suspect that “it may be a bit of a weird market for the next six weeks”, so they’re withdrawing some cash now and sitting on the sidelines while waiting to see what happens. However, it’s not all about Brexit – the reality is that UK commercial property also looks somewhat overheated following a strong post-crisis recovery.
It’s a valuable reminder of the risks inherent in investing in an illiquid asset such as commercial property. As Rory McPherson of Psigma tells Investment Week, “we do not believe that [these funds] should be structured as daily dealing vehicles as the underlying assets are not liquid”.
A better bet for gaining exposure to the commercial property sector is to use closed-ended funds, such as real-estate investment trusts (Reits). The fact that the shares trade independently of the underlying portfolio means that the managers will never be forced to sell properties at fire sale prices because of a “run” on the fund. Of course, it won’t protect you against buying at the wrong stage of the property cycle, but it does mean that you’ll always be able to get at your money – even if it’s at a loss.