The biggest net retail outflows from property funds since 2008 have made managers wary of a rush for the exit, despite positive return forecasts.
The sector suffered net retail outflows of £119m in February, the largest since November 2008. This was consistent with withdrawals seen from a number of asset classes, but the liquidity risk in open-ended property funds has been flagged as a complicating factor.
Andy Brunner, head of investment strategy at Morningstar, said future performance, which most predict is now more reliant on income than capital growth, may not compensate for the asset class’s illiquidity.
He said: “With growing risks to the UK economy from slowing global growth and Brexit, it is not inconceivable that hot money which moved into the sector chasing prior double-digit returns could exit again.”
David Hambidge, director of multi-asset funds at Premier Asset Management, said he was not “uber-bearish”, but warned there was “a lot of profit to be taken” after a three-year period in which total returns on UK commercial property have topped 50 per cent.
Total return forecasts for the asset class in 2016 have been falling and now stand at mid-single-digit levels – a baseline which will be further eroded by active fund fees and managers’ need to hold sizeable cash balances for liquidity purposes.
Concerns were raised earlier this year when Aberdeen Asset Management moved its Property Trust from offer pricing to a mid-price basis following a slowing of flows, effectively knocking 3.8 per cent off investor returns.
Mr Brunner described the possibility of more managers moving their pricing basis downwards to deter investors from exiting as “an added and unpalatable risk”.
Mr Hambidge has cut exposure to property funds run by Aberdeen, Henderson, M&G and Standard Life in the past six months, halving exposure in Premier’s Multi-Asset Distribution fund to 10 per cent.
Others who are sanguine over the outlook for the asset class agree that liquidity risks may be present in some areas.
“When I’m out on the road and speaking to advisers, I’ve been a little concerned that some advisers did have really large parts of their portfolios in property,” said Legal & General Investment Management’s Justin Onuekwusi, who puts a maximum of 10 per cent of his portfolios in the asset class.
“The best way to manage liquidity is not to have a big allocation in the first place.”
Mr Onuekwusi has stopped allocating flows to the asset class but remains a believer in the “UK property story”.
Other buyers say they see few alternatives, given 10-year UK government bond yields are below 1.5 per cent.
Parmenion investment manager Andrew Gilbert said: “The historic yield on the property funds we hold is still 3 to 4 per cent. There doesn’t seem to be a better home at this point.”
