PropertyOct 30 2020

The big property fund cash dilemma

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The big property fund cash dilemma

Cash levels in property funds pose a major dilemma for the sector, as questions are raised over whether recently opened funds will stay ungated and if some are even near to reopening.

Analysts have raised red flags about whether the funds that have allowed investors access to their cash will be able to meet the level of predicted redemptions, even while holding upwards of 20 per cent cash levels.

Meanwhile, analysis by FTAdviser shows some closed funds hold as little as 8 per cent of their portfolio in cash, despite preparing for outflows once reopening.

Ben Yearsley, investment consultant at Fairview Investing, said: “My feeling is that they will all end up having to close again.
“Property funds will continue to have outflows throughout October, and when you get sub-10 per cent cash levels you have to start thinking about closing again.”

Adrian Lowcock, head of personal investing at Willis Owen, agreed, saying there was a “distinct possibility” that property funds would be suspended again by Christmas, while Oli Creasy, head of property fund research at Quilter Cheviot, said it was possible a “liquidity crunch” could force funds to suspend.

Data collected by FTAdviser shows most funds that have reopened hold at least 20 per cent of the fund’s assets in cash – the exceptions being Royal London’s Property fund, which is aimed at institutional investors and has different redemption terms, and BMO’s Property Growth & Income fund, which holds primarily investment trust shares.

In ‘normal’ circumstances you would expect most property funds to have about 15 per cent of the portfolio in cash but, having been suspended since March, most are anticipating hefty outflows.

FundAUMCash levelsSuspended?
Standard Life Investments UK Real Estate£1.6bn22% (September 2020)Reopening Nov 16
Aberdeen UK Property£975m25% (September 2020)Reopening Nov 16
Aegon Property Income£426m7.5% (September 2020)Closed
Aviva Investors UK Property£393m21.5% (September 2020)Closed
BMO UK Property£480m24% (September 2020)Closed
BMO Property Growth & Income£420m3.3% (September 2020)Opened
Janus Henderson UK Property£1.8bn20% (September 2020)Closed
L&G UK Property£2.9bn26% (August 2020)Open
LF Canada Life£341m30% (October 2020)Open
M&G Property Portfolio£2.1bn11% (September 2020)Closed
Royal London Property£390m10.2% (June 2020)Open
Columbia Threadneedle£946m20% (August 2020)Open

Last week, Morningstar estimated that investors pulled £74m from Columbia Threadneedle’s UK Property fund in September after it opened mid-month.

This accounted for roughly 8 per cent of its assets under management. At the end of August, the fund held 20 per cent in cash.

Mr Yearsley said the outflows level was “quite large” for a fund this size, noting that over the two weeks the portfolio had been open, the fund had lost almost half its cash pot.

FTAdviser understands the fund remains within its cash reserves targets of 5 to 15 per cent.

The backdrop

All UK property funds were suspended in the third week of March at the start of the coronavirus crisis when independent valuers said they were unable to provide accurate and reliable valuations for the funds’ assets.

Rules announced by the Financial Conduct Authority last year require property funds to automatically suspend when their valuers find material uncertainty over the pricing of 20 per cent or more of their assets.

It was the second time in four years that investors in property funds had been locked away from their cash. A number of funds were forced to pause trading in July 2016 after thousands of investors pulled their cash in the aftermath of the EU referendum.

Opening soon?

Jason Hollands, managing director at Tilney, said it was likely that funds with 20 per cent or more liquidity would reopen over the coming months.

But both Aegon and M&G’s property portfolios have significantly below that level of cash. At the end of September, 11 per cent of the M&G Property Portfolio was in cash, while usable money accounted for just 7.5 per cent of the Aegon Property Income fund.

Darius McDermott, managing director at FundCalibre, said: “In ‘normal’ times you would expect most property funds to have about a 15 per cent cash buffer.

“But we are not in normal times – far from it. Covid has meant more people working from home and has accelerated the shift to online retail.

“The companies will be making sure they can match these [cash] levels and have an extra buffer before reopening, so that they don’t face another closure.”

A wider dilemma

Property funds are caught in the balance between needing a liquidity buffer to meet expected redemptions while ensuring the cash does not drag too much on returns from the assets investors actually want exposure to.

Mr Lowcock said: “Too much cash and your performance could lag and investors rightfully ask why they are paying a manager fees to invest in property.

“Too little and that increases the risks of further suspensions in the future.”

And investors pay investment management fees for that 20 per cent holding.

Analysis from FTAdviser last year showed the industry could be making up to £16.2m from the practice of charging a management fee on the cash holding.

This means a typical annual management charge of 0.75 per cent is actually a grossed up fee of 0.9375 per cent on the invested portion of the portfolio.

Laith Khalaf, financial analyst at AJ Bell, said the problem of too much or too little cash and potential suspensions “underlined the drawbacks” of investing in property through an open-ended fund.

He added: “Levels of cash are very high, and yet may not prove to be sufficient.

“Moreover, even if they are, in some funds this means 20 per cent of investors’ money sitting in cash earning next to nothing year in year out.”

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