Outflows surge after Brexit vote

Figures show 2016 had not been good for property sentiment even before the idea of Brexit became a reality in June. In the seven months to the end of July, the asset class only saw positive net retail sales in March, and even that was a meagre £3m. In every other month there have been net retail outflows, including a significant £1.5bn in June following the referendum result and a further £792m in July.

This reversal in popularity is the principal reason why so many open-ended property funds suspended trading, including big names such as M&G, Aviva Investors, Henderson and Standard Life Investments.

Since then, both Canada Life and Columbia Threadneedle have lifted the suspensions in force on their UK Property funds. Canada Life noted that although conditions in the commercial property market “show some stabilisation, property valuations continue to be subject to some uncertainty due to the unknown impact of the UK’s vote to exit the EU. Canada Life will continue to apply a fair value adjustment on property values in the fund”.

The issue of flows and redemptions is one of the reasons why closed-ended vehicles may appear more suited to an illiquid asset class, such as commercial property, although Brexit has also had an impact on the share prices of some of these investment trusts.

Annabel Brodie-Smith, communications director at the AIC, explains: “An investment company with a closed-ended structure is particularly suitable for an illiquid asset like property. Of course, when sentiment changes, investment companies’ share prices will suffer adversely. But at least if you need to sell your shares, you can. You may not like the price but you can get out.”

But Darius McDermott, managing director at FundCalibre, points out there is not necessarily a right answer when debating open versus closed property funds.

“Open-ended vehicles run the risk of gating at times of market stress – as we have seen recently. But while closed-ended vehicles remain ‘open’, they had some very big discounts too – up to 30 per cent in a couple of cases. Yes, you could get your money, but at quite a cost. Arguably, gating did its job. It stopped people from redeeming when they would have had to take a big hit on their investments,” he explains.

Glenn Meyer, head of managed funds at RC Brown, notes many fund of funds and discretionary fund managers reduced their clients’ exposure to commercial property funds for asset allocation reasons ahead of the recent panic selling, so whether and when to go back into property are very pertinent questions.

“Looked at rationally, if a fund is forced to sell a property to meet redemptions then, by definition, it is a buyer’s market and the buyer will pay as little as possible. This makes the rental yield and potential upward revaluation of the building relatively attractive for the new owner. Who wouldn’t want a piece of this kind of action? The challenge is that, for the most part, the buyers of these distressed assets will not be open-ended retail funds and this may make them relatively unattractive in the short term. On the other hand, a large closed-ended fund with high liquidity, access to low-cost credit and already trading at a discount may make a good short-term investment.

“The problem for many discretionary managers, who want to make the same trade for all clients at the same time, is that the liquidity in closed-ended funds may not be what they need and many have tended to select open-ended over closed-ended funds for this reason. But these are not normal times and nimble fund buyers may well be justified in making tactical purchases of closed-ended property funds,” he adds.

Does this mean there is still life in the asset class?

Guy Morrell, manager of the HSBC Open Global Property fund, says while it is still worth investing in property post-Brexit, “investors will probably be more interested in the type of property exposure they have, rather than whether they are exposed to the sector or not”.

He adds: “Liquidity and the ability to deliver robust performance during all market conditions are likely to be increasingly important considerations. We reduced our weighting of around 30 per cent to UK direct property funds immediately before the EU referendum to around 3 per cent shortly afterwards. We continue to hold the view that unlisted UK commercial property has become less attractive since the referendum, although the full impact on returns and pricing will take some time to emerge.”

Nyree Stewart is features editor at Investment Adviser