The open-ended property fund sector is in a state of paralysis and there is no obvious solution to the liquidity mismatch causing sustained outflows from the sector, experts have said.
Earlier this month Janus Henderson sold the book of properties in its open-ended property fund after exploring various options against the backdrop of uncertainty for the vehicles.
The sale is the latest in a string of closures, suspensions and resulting volatility in the open-ended property fund sector.
The problem faced is the mismatch between the daily trading of open-ended property funds, and the illiquid nature of property, which cannot be sold quickly in the case of high redemption requests.
Open-ended property fund sizes
Property fund | Fund size April 2017 | Fund size March 2022 | Total flows April 2017 - March 2022 |
VT Redlands | N/A | £115mn | £60mn |
Threadneedle UK Property Fund | £1.2bn | £524mn | -£771mn |
Standard Life Investments UK Real Estate Fund | £2.5bn | £1.6bn | £165mn |
Royal London Property | £398mn | £463mn | £36mn |
MGTS St Johns High Income Property Fund | £56mn | £184mn | £143mn |
M&G Property Portfolio | £4bn | £1bn | -£3.1bn |
LF Canlife UK Property Fund | N/A | £339mn | £16.4mn |
Legal & General UK Property Fund | £2.7bn | £2.4bn | -£808mn |
Janus Henderson UK Property Fund (portfolio sold) | £1bn | £200mn | -£977mn |
BMO UK Property Fund | £326mn | £300mn | -£80mn |
ARC TIME Social Long Income Property | N/A | £162mn | N/A |
ARC TIME Commercial Long Income | N/A | £370mn | N/A |
Source: Morningstar
Since April 2017, £5bn has flowed out of the sector, according to data from Morningstar.
Former Bank of England governor Mark Carney famously said funds which invest in illiquid assets but offer daily dealing were "built on a lie".
Waves of redemptions
The issues began after the Brexit vote in 2016, when the funds rushed to gate for redemptions amid concerns over valuations.
Then again in 2020 the pandemic left the fund managers with no choice but to suspend the funds again, after most independent valuers said the market conditions left it impossible to value the makeup of the portfolios.
In May last year Aviva Investors closed its UK property fund over concerns that it had become increasingly challenging to generate positive returns while also retaining enough liquidity to re-open the fund, which remained gated since the start of the pandemic.
The next month Aegon also closed its property fund, citing similar issues.
Open vs closed ended
Nick Britton, head of intermediary communications at the Association of Investment Companies said he was surprised open-ended property funds were successful in gathering assets for so long.
“Putting illiquid assets into a daily-dealing, open-ended structure was always bound to lead to widespread suspensions whenever markets wobbled.”
Britton said in other countries, such as the US and Japan, real estate investment trusts (Reits) have long been accepted as the standard way for retail investors to gain property exposure.
Some even have regulations that effectively ban daily-dealing open-ended funds from holding assets like property, he said.
“In the UK, however, with our famed obsession with bricks and mortar, we embraced the promise of exposure to an illiquid asset in a fund you could cash in any time you liked.”
He said it is clear investors are voting with their feet and highlighted how closed-ended property funds have seen ten-year total returns of 226 per cent for the UK commercial property sector versus 161 per cent for open-ended equivalents.
Managing director at Tilney, Jason Hollands, said the closures of these funds during times of market stress are a reminder that the open-ended structure is not optimal for holding an illiquid asset.
“Investors either need to be prepared for those funds to be gated at times of market stress, or the funds end up having to hold very large liquidity buffers which dilute some of the return potential.”
