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Investors are still waiting for fund manager M&G to reopen one of its flagship property funds, which was shuttered to redemptions in early December. The M&G Property Portfolio’s Authorised Corporate Director told the market that the fund would remain suspended into February.

Behind the scenes, the fund’s managers are understood to be battling to increase the amount of cash in the M&G property fund in order to meet what is likely to be a growing queue of redemption requests. The fund manager blamed Brexit and shifts in the complexion of the UK commercial property sector for the sudden need to suspend the fund.

Since the fund was suspended, approximately £200 million of the fund’s portfolio has either been sold or is in the process of being divested, according to M&G. Unlike shares, however, real estate portfolios are far more illiquid and take time to dispose of.

Property funds keep small cash buffers only

Managers of property funds, like this one, tend to maintain a small cash buffer only. This is because customers expect them to be invested in the asset class and cash that is being held back is not going to earn a high rate of interest at the moment. Property as an investment needs to be seen as a much longer term play than shares.

This fund was last valued at approximately £2.6 billion in size. Redemptions are likely to nibble away at that now. The other concern is going to be valuation of assets.

One of the big worries for UK property funds is their exposure to large commercial shopping centres. These were once favoured by bigger property fund managers but both Brexit and the shift over to digital shopping has meant that many are simply not worth what they were originally paid for.

In some cases the valuations of bigger shopping centres have been cut by as much as 90% as many shopping centres in the UK are now ageing and need to be demolished, but local councils are proving obstructive when it comes to looking at alternatives. This is proving to be a concern for property funds that have backed big landmark shopping centres around the country.

In its commentary issued to financial advisers dated 8 November, M&G said:

“It has been well documented that the bricks and mortar retail sector is suffering substantial headwinds. The rise of e-commerce coupled with substantial retailer failures is increasing uncertainty across the sector. Retailers are reluctant to pay high rents and investors are decreasing their appetite for retail assets.”

According to the report issued in September, the fund’s managers had been trying to stay underweight high street assets, with allocations to warehouses and commercial office space instead. However, there was focus on large, regional shopping centre projects.

Last year M&G was meeting redemptions with the sale of properties within the portfolio, including Fountain House in Belfast and the Rams Walk shopping centre in Hampshire. While the managers had been allocating to REITS (real estate investment trusts), the only direct purchase made was a Premier Inn and MacDonald’s site in Salisbury. It is significant that the REIT allocations were to the Segro and Warehouse REITs.

Don’t forget to check out The Armchair Trader’s podcast for the latest on UK property and other markets.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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