Property funds have come to the forefront for the wrong reasons following the announced closures of three open-ended funds, including the M&G Property Portfolio fund ahead of its closure.
It comes after years of suspensions and reopenings caused by mass investor withdrawals, with managers having to gate to buy time to sell their holdings. This most notably occurred after financial crisis, post-Brexit and again during the Covid pandemic.
Rob Burgeman, investment manager at RBC Brewin Dolphin, said: “We have seen several instances in the more recent past where dramatic flows have forced the fund managers to suspend, shutter or delay redemptions from their funds.”
There is a clear mismatch between investors’ desire to be able to buy and sell and the easiness to acquire or get rid of the underlying assets.
Burgeman added: “Where property is concerned, there can often be a substantial gap and price difference between the expression of a desire to sell and actually receiving the proceeds.
“What’s more, if investors head for the door, the fund becomes a forced seller, which is an unenviable position to be in. Prices become precedent – they become evidence for future deals – and that can become a vicious cycle.”
As a result, Michael Heapy, senior investment analyst at IBOSS, does not see a lot of reasons for retail investors to have exposure to the asset class via open-ended funds.
This might not be as much of a concern for institutional investors who may still want to get their direct property exposure via an open-ended fund for the diversification benefits, although they will have to sacrifice liquidity for this.
Elston Consulting is also bearish on direct property open-ended fund and does not recommend to its clients to hold that type of funds. In fact, head of research Henry Cobbe expects assets currently in direct property funds to be diverted into liquid property securities index funds and ETFs, long-term asset funds as well as investment trusts, as those structures are not constrained by daily liquidity.
Yet, close-ended funds have also suffered in recent times and have the additional complexity of carrying fund-level leverage, which is an issue with falling values and rising interest costs.
Moreover, investment trusts have a premium/discount to net asset value (NAV) mechanism that is demand-driven rather than fundamental driven.
Cobbe said: “Whilst this may create interesting opportunities to acquire property investment trusts at a price point below NAV, there needs to be a catalyst to remove the discount. That will also be demand-based.”
Nonetheless, the three wealth managers stressed that investors should not shun the asset class either.
For instance, Burgeman believes that property is one of the many sectors that are due for a rebound after having been hit hard by rising interest rates and the after-effects of the pandemic.
Property is also a useful diversifier, although the asset class can be highly cyclical. Heapy highlighted that conventional asset classes such as equities and bonds fell in tandem last year, which has made alternative asset classes an increasingly important part in a portfolio.
He said: “Property and infrastructure funds are considered to be asset classes offering protection against inflation, a topic we have been all too familiar with over the past 12-18 months.
“The tangible nature of such assets also leads to them being considered more of a ‘real’ asset. It's also worth noting that the inflation hedge via infrastructure is imperfect.”
Investors must, however, exercise caution when building their exposure to property. For instance, Cobbe prefers US-focused exposures over the UK and Europe as he sees better prospects for recovery across the pond.
He added: “Investors should focus on targeted regional exposures and if not sure use a global property securities index fund. We think investors are best served by property securities index funds and ETFs to avoid the liquidity issues that otherwise come with the sector.
“Whilst this means having higher exhibited volatility (property OEICs' volatility is arguably understated), it is still the same underlying economic exposure.”
Heapy added that investors need to ensure that the funds they choose do not have any legacy assets within and that there is consistent demand for the fund.