Are Open-Ended Property Funds Match-Fit For Brexit?
History would suggest that, if there is a disorderly no-deal Brexit, money is going to flee the open-ended property funds where investors are the person on the street.
When the UK voted to leave the EU in June 2016, investors pulled billions from these funds, and they had to block withdrawals and sell assets quickly. They were the only forced sellers in the mini-downturn that followed the vote.
According to fund platform Calastone, cash withdrawals from these funds are ticking up again, as rhetoric from new Prime Minister Boris Johnson indicates that the UK will be leaving the EU on 31 October, deal or no deal. According to Calastone, £184M was withdrawn from property funds in July, the highest total since January. The Bank of England has said it is on alert over any issue with withdrawals from the funds.
So how well prepared are the biggest property funds, run by some of the UK’s top institutions, for a post-Brexit rush for the exit from investors?
Cash buffers vary, and some are still heavily exposed to a retail sector where assets are hard to shift. Bisnow takes a look at the biggest funds in the sector.
The L&G UK Property Fund
L&G’s property fund was one of a very few of the large funds that did not stop investors withdrawing their money in 2016, and it has been rewarded for that: While most of the funds in the sector have gotten smaller since the Brexit vote, L&G’s has grown, increasing from £2.1B in May 2016 to £3.27B today, making it the largest in the sector. And it is clearly keen to make sure it does not close its doors again in the event of a run on UK property funds.
Cash or cash equivalents make up 30% of its assets, by far the highest in the sector. It also has one of the lowest exposures to retail assets at 15%, meaning it has one of the highest one-year returns at 2.1%.
M&G Property Portfolio
M&G’s fund is the second largest in the sector, at £3.1B of assets under management, a decrease of £1B since May 2016. It also has a relatively low weighting towards retail, at 17%, but also has one of the lowest cash positions of the big funds in the sector at 11%.
The Janus Henderson UK Property Fund
The open-ended fund run by Nuveen, under its Janus Henderson brand, is another to have seen a large drop in value since the Brexit vote, with its assets dropping from £3.6B to £2.4B today. That is in spite of having a one-year return of 2.8%, the best among the larger funds in the sector. It is the middle-of-the-pack in terms of cash reserves, which stand at about 20%, and its retail exposure is again about the median level of 27%.
Standard Life Investments UK Real Estate Fund
Standard Life’s £2.1B property fund has the second-highest cash reserves in the sector at 24%. It also has exposure to retail at the lower end of the scale at 17%, and its largest asset class is industrial, at 36%, which remains the darling of the real estate world.
Aberdeen UK Property Fund
The Aberdeen UK Property Fund was a poster child for the run on open-ended property funds after the Brexit vote. It was one of the first to shut its doors, suffered very high redemptions and had to undertake a number of high-profile forced sales of its best assets. As a result of this, it has seen the biggest reduction in size on an absolute basis of any fund in the sector, more than halving from £3.4B to £1.56B. It has a cash buffer of 18% now, about average among the big funds in the sector, but as a result of selling London offices, it now has a very high exposure to the struggling retail sector at 46%.
Threadneedle UK Property Fund
The Threadneedle UK Property Fund is one of the few to have actually grown since the Brexit vote, increasing slightly from £1.3B to £1.4B in assets under management. That is despite its one-year return lagging peers at -4.6%. It will be hoping it can maintain that resilience if there is a wider run on property funds: Its 11% is at the lower end of the cash buffers in the sector. It also has one of the higher exposures to retail at 31%.
Aviva Investors Property Trust
When measuring in percentage terms, Aviva’s open-ended fund has suffered the biggest drop in the sector, with its assets falling almost two-thirds from £1.8B in mid 2016 to just £633M today. It has cash and liquid assets of 17% and the second-highest exposure to retail at 35%.