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One of the UK’s biggest property funds, which owns shopping centres across the country, has alarmed investors by banning withdrawals and blaming both Brexit and the retail downturn for its problems.
The £2.5bn M&G Property Portfolio was suspended after “unusually high and sustained outflows” – demand from investors for their money back – prompted by “Brexit-related political uncertainty and ongoing structural shifts in the UK retail sector”.
Nearly £1bn has been withdrawn by investors from the fund over the last year. M&G admitted it had been unable to sell commercial property fast enough to fund the rush for the door by investors, leaving it with no choice but to block further withdrawals.
The fund’s biggest holdings include shopping centres such as Fremlin Walk in Maidstone, Kent, where House of Fraser is one of the biggest tenants, the Gracechurch centre in Sutton Coldfield, where stores include House of Fraser, Topshop and New Look and the Wales designer Outlet in Bridgend, home to retailers including Marks & Spencer and Next.
Investors may now have to wait months to see their cash again. In the aftermath of the Brexit referendum in 2016, M&G’s fund was shut from July to November, as panicked investors fearing a collapse in values were prevented from withdrawing their cash.
There will now be concern of a domino effect in a repeat of the 2016 experience, when funds worth a total of £35bn were forced to close their doors.
M&G said the suspension would give it time to sell property to raise cash to repay investors. While the fund is suspended, M&G will cut the fees it charges to manage the fund. M&G did not give a timeline for when the fund would be reopened, saying it was monitoring the situation daily.
The fund is the latest victim of Britain’s ailing high streets and shopping centres. Last month, the independent valuers Knight Frank knocked £76m off the value of the fund’s retail assets, after what Knight Frank described as a marked deterioration in the retail sector since the summer. It warned of falling rents even in highly sought after locations.
The suspension of the fund is highly embarrassing for the M&G group, one of the world’s largest property investors with £33.5bn invested on behalf of small investors and pension funds alike.
Its property investments are largely focused on retail parks, which have been hit particularly hard by the problems facing bricks and mortar retailers, which include cost increases driven by the higher minimum wage and business rates bills and the switch by shoppers to buying more goods online.
According to the Local Data Company retail parks had the biggest rise in store vacancies, up 2.3%, in the first half of this year. That compares with a 0.5% rise of high streets.
Many retailers, including New Look, Monsoon and Debenhams have used a legal insolvency procedure to force rent cuts – which hit the value of property – while House of Fraser, which is owned by Sports Direct, has agreed many low or no rent deals with its landlords as the department store chain struggles to stay afloat.
Gina Miller, the anti-Brexit campaigner who also manages an investment firm, SCM Direct, said M&G’s decision to partly blame Brexit was a distraction as there had been related uncertainty since the 2016 EU referendum.
“The real question is why did M&G decide to invest as much as 36.4% of the fund in retail,” said Miller. “Why on earth did the regulator, the FCA, and M&G allow these direct property funds to be marketed to retail investors given the fundamental mismatch between the underlying liquidity of its assets and the daily dealing of the fund?”
The suspension of the fund is likely to raise further alarm among investors as it comes so soon after the debacle at Woodford funds, which was also unable to finance withdrawals from investors.
Ryan Hughes of AJ Bell, an investment platform, said: “M&G’s decision to suspend the fund comes at a time when there is heightened concern about liquidity in funds, with investors understandably jittery after Woodford’s fund closure. ”
The cash level in the M&G fund, used to pay for withdrawals, had fallen to just 5%, leaving little spare to meet further demands from investors.
The fund’s performance has been weak for several years. It is showing a loss of 7.8% for investors over the past year and is the second-worst performer of 15 funds in its sector over that period. Other large property funds, including those from Aberdeen Standard, Threadneedle and Aviva, are also showing losses similar to those at M&G.
“This news will unnerve them, because it may spark some additional selling from large holders,” said Jason Hollands, a fund adviser at Tilney Investment Management Services.
A spokesperson for Aberdeen Standard said its two major property funds, SLI UK Real Estate and Aberdeen UK Property, had cash positions of 15.7% and 12.7% respectively, so there was no immediate need to block withdrawals.
It said: “We will continue to monitor the situation closely and in particular any impact M&G’s decision has on investor sentiment towards the sector.”
One fund adviser blamed fears of a Labour government led by Jeremy Corbyn. Brian Dennehy, co-founder of independent financial advisers Dennehy Weller, said: “The rush by ‘the smart money’ [eg multi-managers, discretionary mangers, various pension funds] to sell property funds the day after the Brexit referendum wasn’t a smart thing to do as it forced prices lower and triggered fund suspensions. More to the point these people should know better than anyone that property is not liquid and you can’t all get out in a hurry – this is basic stuff.
“To avoid the brickbats this time, ‘the smart money’ has been selling ahead of the general election, as a Corbyn-led government will likely trigger a sell-off.”
M&G shares closed down 2.7%.
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