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Fund manager M&G is to close its £565mn property fund following sustained outflows by UK retail investors looking to get out of the ailing real estate market.
The London-listed asset manager on Thursday said it would suspend daily dealing in the fund from October 19 because of “declining interest” from retail investors, and would sell the underlying assets in an effort to return cash to clients — a process that could take 18 months.
The final closing of the fund comes after two previous suspensions by M&G over the past seven years.
Investors now face a “frustrating wait” before their money is returned, according to Ryan Hughes, head of investment partnerships at AJ Bell, the fund platform.
“Any potential buyer will now be in pole position in the knowledge that M&G are looking to offload over £500mn of property assets into a market that is not exactly buoyant at the moment,” Hughes said.
Investors will still have to pay fees on the suspended fund, which have been reduced from 0.8 per cent a year to 0.6 per cent. The charges will not be applied to any cash held in it and M&G intends to continue to pay income distributions during the winding-up process, it said.
The closure illustrates the renewed strains affecting the UK’s property fund sector, which suffered a spate of suspensions following the Brexit vote in 2016 and again during the early stages of the coronavirus pandemic in 2020 when lockdowns cast doubt on the future value of office buildings.
Fear that the sector remained vulnerable to a liquidity crunch prompted the UK’s Financial Conduct Authority to conduct a review in 2020 but the regulator stopped short of banning daily trading funds from investing in illiquid property assets.
Neal Brooks, M&G’s global head of product and distribution, said declining retail investor interest was “posing challenges to the future viability of funds like the M&G Property Portfolio, particularly for those investors who require daily liquidity”.
M&G said it had become harder for its fund managers to keep portfolios diversified due to high transaction costs and the smaller size of its fund, amid a backdrop of “continued and potentially accelerating outflows”.
M&G’s property fund suspended trading in 2016 following the Brexit vote when it had assets of $4.4bn. After reopening in October 2016, it was forced to suspend trading for a second time in December 2019 following large customer withdrawals due to fears about Brexit. It reopened in May 2021 and the fund’s assets have since shrunk to £565mn.
A number of property funds have been forced to limit withdrawals as central banks implemented sharp and successive increases in the cost of borrowing. UK funds were hit particularly hard in the wake of the Kwasi Kwarteng mini-Budget last September, with M&G, Schroders, Columbia Threadneedle, and BlackRock among the asset managers that restricted withdrawals.
Janus Henderson, another asset manager, last year closed its UK property fund citing the “ongoing uncertainty faced by daily dealing property funds”.
Oli Creasey, an analyst at Quilter Cheviot, said M&G’s liquidation announcement was not a “massive surprise” due to the challenges of diversifying real estate portfolios with less than £1bn in assets.
Creasey warned there could be more closures to come as the largest remaining property funds had also dwindled in size due to falling valuations and customer outflows in the second half of 2022.
Canada Life Asset Management last week suspended withdrawals from its £254mn UK property fund after the “overwhelming majority” of its investors indicated they wanted an exit.
