Investor appetite for property funds returns

UK commercial property funds are yet back on an even keel, but investor appetite for the asset class is returning, according to M&G Investments.

M&G was one of a number of managers to temporarily suspend trading in its property fund, M&G Property Portfolio, in order to protect existing investors against the impact of a rush of redemptions in the wake of the UK's vote to leave the European Union in June.

Some of those funds, including those run by Legal & General, Columbia Threadneedle and Canada Life, have already moved to remove exit penalties and suspensions, while Henderson will re-open its UK Property fund on 14 October.

M&G have not put a timetable on when they will follow suit, but manager Fiona Rowley says she is working hard to re-open the fund, with some of their larger investors now looking to re-invest.

NOT OUT OF THE WOODS YET

'Obviously there's no room for complacency,' says Rowley. 'I'm not going to say we're out of the woods yet, but I am confident supply fundamentals are supportive. We are going to have some short-term headwinds, but I'm confident in the medium term about the fundamentals of this asset class.'

Andrew Watson, head of UK retail sales at M&G, says his team has been engaging with existing investors in the fund 'to gauge their feelings post-Brexit and what their intentions may be'.

'The thing that we've seen is that the urgency to sell seems to have gone away, which is a positive sign, and we have had a lot of interest from people saying they want to put money into the fund,' he adds.

Rowley insists there has not been a 'fire sale' at M&G but an 'orderly disposal' of what she terms 'good secondary assets'.

This means the fund is likely to retain a majority of prime property after disposals have been completed.

Ainslie McLennan, co-manager of the Henderson UK Property PAIF Fund, agrees with Rowley that the fundamentals of the sector remain strong, and both funds are confident their income yields remain attractive.

'Property investment is not without risks, given potential shifts in demand from investors and occupiers,' says McLennan.

'However, if the UK's negotiations with Europe are managed well, there should not be a long-term change to the fundamental benefits of investing in UK commercial property.'

HOW ARE FUNDS GETTING LIQUIDITY BACK?

M&G says it is aiming for a cash level above 15 per cent before it re-opens the Property Portfolio fund, with around £350 million worth of properties set to be sold at an aggregate discount to pre-Brexit levels of 3-4 per cent.

Rowley insists none of these properties will be sold at a significant discount to their pre-Brexit valuations, with many being sold at a premium.

For instance, a portfolio of four petrol filling stations was sold for £12.9 million, a 6.6 per cent premium to its pre-Brexit valuation of £12.1 million. In contrast, however, 1 The Square, Bristol, was sold at an 8.9 per cent discount.

Rowley also says the fund is disposing of risk by selling its good secondary assets, which she describes as properties in the right locations that have short leases or need some refurbishments.

This includes Ignis House, 50 Bothwell Street in Glasgow, which Rowley says is 'a good asset in a good location'. However, the lease expires in 2017 and its tenant, Ignis Investment Services, has decided to move to another premises.

Henderson UK Property, meanwhile, intends to maintain a cash weighting of around 20 per cent and has sold or received offers on 23 assets since it was suspended.

It has sold a number of those properties already, including one in Trafford Park, Manchester, that the firm says netted it an annualised total return of 8 per cent since 2013.

It has also sold The Ship, a pub in Mortlake, West London, and Lloyds Bank in Islington, which both returned annualised gains in excess of 20 per cent.

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