The M&G Property fund, one of the largest property funds in the UK, suspended dealing this week due to "unusually high and sustained outflows" This fund provided daily dealing but the underlying assets are direct property holdings, which require more time to transact. There are several funds like this which provide exposure to property in an apparently liquid format. In general, they hold significant cash levels with some investment in Real Estate Investment Trusts (REITs) that can provide some liquidity. Holding cash, in some cases as much as 30%, dilutes the return, and if they hold REITs this adds an extra layer of costs and they can trade at a discount when the market sells off, adding to volatility.
In the case of the M&G Property fund, the fund held a significant exposure to the retail sector. As shopping has moved predominately online, selling retail properties has become harder. If they are forced sellers, the bid price may be significantly below previous valuations. The M&G Property fund revalued its holdings monthly and has fallen 8.5% this year, including a 3.5% devaluation last month alone. When the fund resumes trading the valuation may be lower still. Whilst in "normal" conditions, when trades are small, liquidity can be maintained, but the offer of daily liquidity is not guaranteed, and investors should only hold onto these funds if they are prepared to persevere through difficult times. We have seen similar problems in funds such as the Woodford Equity Income fund, where the liquidity in certain equity holdings led to a suspension of dealing. Suggesting that, in reality, the offer of daily liquidity may be too good to be true.
Brexit has undoubtedly been problematic for UK property investors. The lack of certainty regarding the UK's future trading relationship with Europe has put off foreign investment and discouraged UK investors from increasing their exposure to the sector. However, the problems in the high street run much deeper with the move to online shopping decimating high street retailers. The list of companies restructuring or simply going out of business seems to rise daily. As a result, shopping centres are likely to remain amongst the least favoured in the property sector, even if Brexit is eventually resolved. Whilst local authorities and governments may take action to support retailers, the shift to online shopping and the associated convenience appears to be irreversible. If this part of the property market is to pick up, it may involve a total repurposing of the space with more residential and leisure facilities in proportion to the remaining retailers.
Overall, a selective approach to property investment is preferred. Investors should remember that this is a long-term investment and those that require daily liquidity may be better advised to stay clear of open-ended funds.
 M&G statement issued Wednesday 4th December https://www.ft.com/content/b1353b70-16a2-11ea-8d73-6303645ac406
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