Have property funds got over their Brexitinduced crisis?

Many were forced to shut when savers took money out after the vote. Are they worth investing in again, asks James Connington

After a disastrous 2016 for property funds, when several were forced to halt withdrawals in the wake of the EU referendum, the sector enjoyed a period of relative prosperity in 2017. But have any of the problems that 2016 highlighted been solved?

In the summer of that year, after the Brexit vote, investors rushed to take money out of property funds as they expected the property market to be badly affected in a widely predicted economic slowdown.

Such mass redemptions pose a major problem for ordinary “openended” property funds: it takes time for them to generate the cash needed to meet requests because properties cannot be sold instantly in the way that shares, for example, can.

Many were forced to suspend redemptions to stem the tide while they raised money from sales. Investment trusts, which are “closed-ended” and don’t allow direct withdrawals by investors, didn’t face the same problem.

The funds affected reopened between July and December 2016. Now, in an attempt to prevent a recurrence of the problem, most have significantly increased the amount of cash they hold.

M&G’s £3.7bn Property Portfolio, L&G’s £3bn UK Property Fund, Janus Henderson’s £3bn UK Property fund and Standard Life’s £2.4bn UK Real Estate fund all now hold between 18pc and 24pc in cash, according to data from FE Trustnet.

While these large holdings of cash provide a means to meet redemptions quickly and painlessly if needed, they automatically reduce returns in a rising market.

The events of 2016 proved to be a major drag on returns from openended property funds. Between the day before the referendum result (June 23) and the end of 2016, the average return from the eight largest active UK property funds was minus 2pc. They have since recovered, with returns from the day of the referendum to date averaging 7pc. Fiona Rowley, manager of M&G’s Property Portfolio, said her fund’s current 17.5pc cash level was above the 7.5pc-12.5pc range she preferred, in order to “manage investor flows”. Since it resumed dealing on Nov 4 2016 the fund has sold 25 properties, with the sales focused on “relatively lowerquality and higher-risk assets”.

Standard Life UK Commercial Property trust and F&C Commercial Property trust, the only two general UK property investment trusts more than £1bn in size, have both fared better than their open-ended counterparts.

As they did not need to sell properties in a hurry to meet redemptions these two closed-ended portfolios returned 9pc and 10pc respectively between

‘Holding high levels of cash damages the ability to generate returns and income’

the referendum and the end of 2016. Between the day before the result and the present they have returned 21pc and 20pc. They have also not had to build large cash holdings.

Andrew Summers, head of fund research at Investec Wealth & Investment, said holding high levels of cash damaged the ability of property funds to generate both capital returns and income.

“Every time you buy and sell a building it costs around 7pc, and the average fund is sitting on 20pc cash. So, say the market is up 10pc, you fall two percentage points behind automatically by holding cash, then 0.7 percentage points a year if you sell buildings every 10 years. Then there are management fees and costs. It makes it difficult to perform,” he said.

Over the year to November 2017 a number of the largest funds experienced significant withdrawals of investors’ money. M&G’s Property Portfolio had withdrawals of £474m over the period, according to FE, while Janus Henderson UK Property had outflows of £419m, Standard Life UK Real Estate £307m and Aviva

The M&G Property Portfolio has invested in Manchester