The manager of the UK’s largest property fund has said she is disposing of assets at “pre-Brexit” prices following the portfolio’s suspension, and suggested some peers were too hasty in their actions as they sought to cope with redemptions earlier this month.
Fiona Rowley, in charge of the £4.4bn M&G Property Portfolio which suspended trading at the start of July alongside a number of peers, said she had completed on £20m of disposals and exchanged on a further £40m since the EU referendum on June 23, all of which “were on no discount to pre-Brexit pricing”.
Ms Rowley said the fund would not resume trading until cash levels reached at least 12.5 per cent of the portfolio, equivalent to around £550m in assets. Cash accounted for £300m as of June 30, two trading days prior to the fund’s suspension.
But the manager said her attempts to divest properties had been hampered by a rival open-ended fund launching a firesale of assets.
“We were having active discussions on some further assets a couple of weeks ago. My actions had to be slightly delayed by the activity of another retail fund who decided to come out to market with a portfolio of assets on Thursday. You had to inspect them, bid by Friday, and give the cash within five working days,” she said, speaking on a webcast with clients.
“A couple of conversations I was having [with sellers], they then said to me ‘I don’t need to speak to you, I’m going to speak to a fund that is willing to accept significant discounts’”.
Ms Rowley added: “Sometimes I feel at the moment like I’m swimming surrounded by great white sharks. Those sharks are US private equity. They are all looking for a 15-20 per cent discount.”
Some potential buyers, however, are more like “dolphins” due to their low cost of capital and willingness to entertain higher valuations, according to the manager.
She said her team has agreed a further £65m worth of sales since the delay, deals which “on aggregate” were sold at prices equivalent to those available pre-referendum.
M&G said its fund’s July 4 suspension arose due to a combination of too-few transactions and an industry-wide surge in redemptions. Ms Rowley insisted the economic backdrop was very different from 2008, and suggested other funds had stoked uncertainty.
“What I wasn’t anticipating was that within 24 hours of the vote, one retail fund decided to do a net value adjustment. I believe that spooked our investor base, the man on the street.
“That then led to redemptions, but as we went through the following week, the rate of redemptions started to ease. We got to Monday and then another fund suspended. That really created high levels of redemptions, which led to our suspension.”
Standard Life Investments was the first to suspend its UK property fund, on July 4, while Henderson Global Investors was the first to make a valuation adjustment on the day after the referendum (June 24).
Jonathan Willcocks, global head of retail sales at M&G, said it remained “very difficult to forecast” how soon the firm’s portfolio would reopen. The fund, in keeping with peers, has suspended trading for a minimum of 28 days.
Ms Rowley said M&G may consider the use of a credit facility to fund redemptions requests should they continue once the fund had reopened - assuming its cash levels had been rebuilt and wider market conditions had settled.
Though the manager said the current environment was very different to that seen in 2008, M&G has made significant reductions to its 12-month forecasts for commercial property. The fund house now expects the asset class as a whole to lose 6.7 per cent on a one-year view, having previously predicted an 8.1 per cent total return.
Its largest forecast downgrade is for Central London office space, now predicted to slump 14.6 per cent over the next year. It had forecasted a positive total return of 7.1 per cent for the sector as recently as April.
Five-year forecasts are little changed, and Ms Rowley said a supply contraction would help the London market. But she emphasised the fund remained underweight central London offices and said she would not be forced to sell assets in the sector on which M&G is most positive - industrial property.
“There is a lot of demand for industrial assets. I could sell those, but if you are patient I don’t have to sell all the quality assets. I want to make sure this fund comes out fit for purpose.”
