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Property funds suffer 'second worst month' of outflows in May

Property funds suffer 'second worst month' of outflows in May

Property funds saw the second-worst month of outflows in May, according to data from funds network Calastone.

UK investors redeemed £445m of their investments in the funds during last month, the second worst month since Calastone began recording flows in 2015.

The worst month was March this year when £589m was withdrawn, compared with £314m in February and £128m in January.

Outflows from real estate funds have now reached £5.6bn after investors have been selling their stakes for 32 consecutive months.

Edward Glyn, head of global markets at Calastone, said: “Record outflows from real-estate funds in March reflected investors booking capital losses before the end of the tax year, as these can be used to limit capital gains tax liabilities. 

“We cautioned that sharply lower outflows in April were likely to prove temporary, but we were surprised by the level of selling activity in May.

He added that the big change that may have impacted the flows last month was the news of the delta variant of Covid, which may prove to be more infectious than previous variants. 

“Anything that delays the return to offices and the removal of limits on capacity in hospitality, retail and leisure venues is bad for commercial property in the short term,” he said. 

“Recent survey data suggests the long term may also be gloomier as companies plan to cut floorspace in future. This seems to have spurred further selling of property funds from investors who seem to be looking for reasons to be negative on the asset class.”

The structure of real estate funds has been under question over the past two years, as the majority gated for redemptions during the pandemic due to issues with the valuations of their underlying assets.

The fundamental issue with the funds is the mismatch in liquidity between the fact that they can be traded daily and the illiquidity of a property asset.

Yesterday (June 8), data from Morningstar showed that just under £800m was withdrawn from M&G’s property fund in the four weeks since it re-opened for investors on April 10.

Last month, Aviva decided to close its property fund over liquidity concerns.

The group said that during the past year, as many property funds gated amid the pandemic-induced valuation uncertainty, it became increasingly challenging to generate positive returns whilst also retaining enough liquidity to re-open the fund.

The firm highlighted how, given the expense of acquiring, managing and disposing of property, size was particularly important for real estate funds.

The FCA has been reviewing the structure of the funds for over a year, and last month postponed its decision to reform the sector while it looks into creating a new fund structure to address the issue.

sally.hickey@ft.com