November 29, 2023
Recent suspensions have brought open-ended property funds back into the spotlight, leaving investors to debate the future of a structure some argue houses an “inherent mismatch”.
Last month, the M&G Property Portfolio and WS Canlife UK Property ACS were suspended ahead of closure, with both managers noting sustained outflows that were unlikely to be reversed.
M&G global head of product and distribution Neal Brooks added the firm “does not foresee a future” for the open-ended direct property structure, a view reinforced by PortfolioMetrix UK head of investments Nic Spicer.
“Today’s open-ended property funds do not have a future,” Spicer declared. “There is an inherent asset/liability mismatch in the structure, which is the feature that has dominated the news and taken up most column inches.
“This has only been exacerbated by Consumer Duty… you cannot offer daily dealing if you cannot deliver it.”
He added there was a “great deal of confusion about how risky the funds really are”, suggesting the traditional measure of volatility is not useful for open-ended property funds.
“In the case of physical property, estimated values from surveyors only update every few months and actual market transactions are very infrequent,” he explained. “As a result, it is not low risk that leads to lower volatility, but rather stale property prices.”
Spicer also argued the “clear alternatives” helped secure the death knell for open-ended property, although M&G’s Brooks noted the firm had found no alternative that would offer investors a comparable product.
‘Not all hope is lost’
While Charles Allen, head of European real estate at Fiera Capital, noted the rumours of the structure’s death “gathers momentum during periods of market volatility”, he argued the ending has yet to be written.
“Let us not be fooled into thinking the challenges faced by the likes of M&G and St James’s Place render the future of these structures a foregone conclusion,” he said.
“There are undoubtedly questions that need answering to recapture the confidence that has been lost in some corners of the investment community, chief of which being the FCA’s ongoing liquidity probe – a languishing affair that could itself be fairly described as open-ended.
“Any move by the FCA must demonstrate restraint to ensure the preservation of the modus operandi – liquidity and ready access to capital.
“The three-year dilly-dally suggests it is aware of that.”
However, he suggested the “underlying architecture” of the fund structure should hold appeal for investors facing a new market cycle, “where the adoption of core strategies is increasingly essential in the pursuit of a diverse portfolio”.
Oli Creasey, property research analyst at Quilter Cheviot, added that, even with just a “handful of funds” owners of the portfolios and asset levels to withstand the “onslaught” of low demand, high interest rates, eternal events and an uncertain regulatory landscape, “not all hope is lost”.
“Property values have fallen dramatically in the past 18 months, as much as up to 20%, and there is a feeling that as interest rates peak, the floor in prices may be reached,” he said. “Clearly you cannot guarantee performance, but we could begin to see somewhat of a bounce should we get beyond peak pessimism.
“Likewise, regulatory clarity will help lift a cloud and create more favourable conditions once the operating environment is known.”
Fiera Capital’s Allen described open-ended property funds as “natural suitors” for investors seeking long-term, risk-adjusted and stable income from real estate investments.
“They offer compelling access to high-quality real estate as well as the ability to deploy capital on-demand and at scale,” he said. “Investors have choice of sector or geographic exposure, both helpful options during paradigm shifts when more resilient real estate asset classes can offer attractive diversification.
“Only an inconceivable amount of regulatory change can threaten the existence of these vehicles, and even then, the regulators would face the wrath of a real estate investment community delivering vital benefits to society.”
Creasey added that those funds with “an attractive portfolio and a solid investment process should outlast this latest period of volatility”, with investors able to access “viable options” until the industry reaches a point at which “open-ended property funds can be repaired”.
Darius McDermott, managing director at Chelsea Financial Services, suggested TR Property investment trust as one such viable option, which focuses on investing in “shares of property companies primarily in Europe and the UK, with a small allocation to physical property in the UK”.
“The trust’s managers seek high-quality businesses across various property sectors, including retail, office, residential and industrial property, as well as alternatives like student accommodation, self-storage and healthcare,” he said.
He added that Cohen & Steers Global Real Estate Securities was a potential option for investors seeking access to “diverse property sectors that were traditionally accessible only to institutional investors with substantial financial resources”.