In early December, one of the UK’s biggest property funds, M&G shut its doors to redemptions blaming Brexit and the retail downturn for its problems, swiftly followed by the Prudential UK Property fund, sparking concerns from industry experts of contagion risk and further gatings for the sector.

The £2.5bn M&G Property Portfolio was suspended after “unusually high and sustained outflows” – nearly £1bn had been withdrawn by investors from the fund over the last year, and M&G found that they couldn’t sell their commercial property interests fast enough to meet investors’ desire to claw back their cash.

Commenting on the suspension of the M&G Property Portfolio fund, Rebecca O’Keeffe, head of investment, interactive investor, said: “Several property funds were closed to redemptions in July 2016 after mass redemptions and the blame was placed at the door of Brexit uncertainty following the referendum. Three and a half years on, the same reason is being blamed for the closure of M&G Property Portfolio for the second time. The fund was closed on July 5 2016 and reopened four months later on November 4 2016. There is a very real prospect that the M&G fund may not be the only property fund to close this time around too.

“Property funds with exposure to bricks and mortar retailers are being hit especially hard as the shift to online shopping has seen a continued deterioration of the high street. However, there is a wider issue around liquidity in general that has been propelled into sharp focus following on from the Woodford debacle.”

“The news of a large Conservative majority government [last week] is likely to create a mini- boom once certainty returns and property funds are likely to go through a much better period.”

An issue of liquidity

Mark Homer of property educational company Progressive Property says: “Property funds have been haemorrhaging cash in recent months with two rounds of heightened anxiety around a potential no deal Brexit and general investor unease partially linked to the possibility of a Labour government.

“As commercial property funds are particularly illiquid, unit trust based commercial property funds need to sell property in order to meet redemptions when investors, many of whom are consumer/retail in origin press sell on their trading accounts. As property can take a while to sell this can mean that redemptions are stopped until enough money has been raised to pay many investors their money.

“The news of a large Conservative majority government [last week] is likely to create a mini- boom once certainty returns and property funds are likely to go through a much better period.”

History repeating – time for a change?

O’Keeffe believes the suspension of the M&G Property Portfolio raises the wider issue of liquidity, she says: “It is disappointing that the industry still hasn’t changed its policy of holding such lumpy and illiquid assets in open-ended funds. It is quite frankly crazy to put these illiquid assets like these into an open-ended fund. You are potentially asking to be a forced seller in stressed markets, which is very bad news for investors.”

Help is hand however for investors, O’Keeffe adds: “From 30 September 2020, new Financial Conduct Authority (FCA) rules come into effect on funds which are illiquid – including UK property funds. These new rules will require that investors are provided with “clear and prominent information on liquidity risks and the circumstances in which access to their funds may be restricted.”