UK property funds’ capacity to meet requests from investors to return their money immediately is the subject of intense debate following the decision this month by M&G to halt trading in its £2.5bn Property Portfolio.
So-called open-ended real estate funds sold to retail investors allow daily trading. But sales of commercial properties can take months to complete, which presents the risk that a property fund might run out of cash if large numbers of investors simultaneously ask for their money back.
Cash levels held by open-ended property investment funds as a buffer to meet redemption requests vary widely across the sector, ranging from 30.9 per cent of assets to just 6.3 per cent, according to Moody’s, the rating agency.
“The risk of contagion is now high, with the M&G suspension reminding investors of the risks associated with illiquid property investments,” said Marina Cremonese, a senior analyst at Moody’s.
The Bank of England and Financial Conduct Authority are due to provide an update on Monday on fund liquidity mismatches.
M&G’s move has sparked fears of a repeat of the crisis that engulfed the sector in 2016 after the Brexit vote when seven commercial property funds were forced to suspend withdrawals, raising doubts over whether retail investors fully appreciated the risk that they might not have immediate access to their money.
Uncertainty over Brexit and the depressed state of the UK’s retail sector has fuelled concerns that M&G’s move could trigger further selling by investors worried about being locked into other property funds.
Investors have pulled a net £2.1bn from real estate funds in the first 10 months of the year, according to Morningstar, the data provider.
Eight managers — including Standard Life, Legal & General and Old Mutual — offering life insurance and pension products that feed into the M&G Property Portfolio have also been forced to suspend withdrawals.
