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Property funds – how much longer will investors be trapped?

INVESTING in property funds has always been billed as a great diversifier for your ISA or pension portfolio. The idea being that if and when the stock market falls, property – as well as other alternative asset classes – acts as a safety net.

There are a number of UK property funds which typically own office blocks, warehouses, restaurants and shops. Investors make returns from rents collected and capital growth. A downside of these funds is that they are prone to shutting their doors to withdrawals. Currently there are billions of pounds of investors’ money trapped in UK property funds that suspended withdrawals earlier in the year.

One by one in March, investment management companies froze funds over uncertainty around building valuations. Surveyors said it was not possible to be sure about what buildings were worth due to the pandemic and lockdown, leading to funds blocking withdrawals to stop a run on the funds.

Defrosted property funds

The good news is that the path for suspended UK property funds to reopen has recently cleared. Some of the ‘material uncertainty’ over valuations has ended now that lockdown measures have been eased. St James’s Place and Columbia Threadneedle have become the first asset managers to lift a suspension of withdrawals from frozen property funds.

St James’s Place lifted the suspension on its three property funds, which together held about £3.6bn of assets under management when they were shuttered. Columbia Threadneedle said that it would lift the temporary dealing suspension on its £1bn Threadneedle UK Property Authorised Investment Fund on 17 September.

The £2.9bn L&G Property fund will allow withdrawals again from 13 October and Royal London Asset Management announced this week that its property fund will open on 30 September.

But most investors are still waiting to get the green light to be able to access their savings. Worse still, fund groups have continued to charge fees while their funds are frozen, though M&G did reduce their fees by around a third.

But other funds remain frozen with no hint of when they might open. It’s been suggested that asset managers could cite Brexit uncertainty as a further reason for keeping their funds shut. Among those still closed are the £2.2bn M&G Property Portfolio, which was forced to suspend before the pandemic owing to poor performance and a lack of liquidity, is yet to reopen.

Quilter Cheviot said less well-positioned are funds such as that run by Aegon, which has reported a cash balance of only 7% as of the end of July. Once the funds do reopen, investors should be prepared for the value of their investment to have fallen.  Platform AJ Bell suggested losses could be around 9%.

Changes afoot

Property fund investors who want to access their money quickly in the future might face a long wait even after the funds have opened if new proposals by the City watchdog go ahead. The Financial Conduct Authority (FCA) has suggested savers should give up to 180 days’ notice if they want their money.

Those requesting a redemption would be committed to selling, but would not know the price until the end of the notice period. These rules, only under consultation for now, could put many people off investing in these funds in the future. The FCA is also consulting on plans to change dealing frequency from daily to quarterly.

Pension headache

Aside from the giant retail property funds, many people are invested in property funds reserved for private pensions held with life companies. In some cases even if a small portion of the pension is held in a suspended property fund, savers are blocked from accessing any of their money – the whole pension is frozen, not just the property element. This presents a difficult situation for those retiring this year or if they want to dip into their pension funds.

Are property funds worth the bother?

This is not the first time there’s been a round of suspensions for property funds. Some were suspended in a downturn after the 2016 Brexit referendum. The ability to suspend funds is not unique to property funds. The FCA says that fund suspensions exist to ‘protect investors in exceptional circumstances’. Woodford Equity Income fund investors will remember their money was frozen following a flood of withdrawal requests amid concerns about its performance.

However, experts maintain that as a long-term investment, property funds can still provide a steady income and be an important diversifier. Investment trusts are worth considering as they can be more flexible. The manager doesn’t have to sell investments to pay withdrawals, unlike open-ended funds – instead they sell their shares in the trust to other buyers. This also means they don’t need to hold large sums of cash to meet potential redemptions, which can drag down returns.

Investors who still want their money in bricks and mortar should remember that experts recommend property should only make up 5-10% of a portfolio.

Photo by Linus Nylund on Unsplash



About the Author:

Holly Thomas
Holly Thomas is an award-winning financial journalist and former Deputy Personal Finance Editor at The Sunday Times. She writes across all areas of personal finance and consumer issues, specialising in investments, mortgages and property. Previously she worked at the Daily Express and Sunday Express as Money editor and also at Financial Times Business. Holly was voted Freelance Journalist of the Year at the HeadlineMoney Awards in 2016. Her work can be seen in national press including The Times, The Daily Telegraph and the Daily Mail. Follow Holly on Twitter: @holly_thomas_

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