Reopening of M & G’s real estate portfolio leaves two frozen real estate funds in the spotlight

Managers of listed real estate vehicles have been spying on the opportunity to signal the benefits of the closed-end structure as two open-ended real estate funds remain frozen and the industry awaits the outcome of the Financial Conduct Authority’s liquidity consultation.

Earlier this week, the authorized managing director of the M&G real estate portfolio announced that the fund would reopen on May 10 after a nearly 17-month freeze. The fund was closed for trading in December 2019 for liquidity reasons after its independent appraiser downgraded the value of its retail holdings, causing a wave of redemptions.

There are only two open funds still closed

M & G’s fund reopening leaves only Aegon Property Income and Aviva Investors UK Property funds still closed – the only two in the series of funds forced to halt trading last March as the Covid pandemic made it difficult to value assets underlying.

Aegon Asset Management says the fund remains on track to reopen in the second quarter and managers continue to make good progress in asset sales to increase liquidity.

Aviva Investors says the fund remains closed while it takes steps to ensure cash flow. “We are aware that the fund could experience a higher volume of redemption requests than usual if it were to reopen for trading,” he said.

M&G makes changes before reopening

Prior to the reopening, M&G increased its cash position to 33% and will implement dual pricing on a full spread basis from June 25. AJ Bell, head of active portfolios Ryan Hughes, says it’s a smart move because it deters investors from diving in and out.

Pricing on a full spread basis means that the buy or offer price is usually higher than the sell price, often by around 5%, in order to pass the transaction costs of the investments to the buyer. underlying. This means that an investor who buys the fund actually pays a fee for any spread to access the fund.

Hughes says, “It’s a much fairer way to ensure that people who want to buy property are doing it for the right reasons and that they understand that access to funds will be expensive. In fact, what he’s trying to do is hunt down people who might have done it for the wrong reasons. “

M&G also said it would not charge a fee on cash held in the portfolio above 20%, which Hughes said “sticks a bit to the throat.” But he says most real estate funds do and until the results of the FCA consultation, which proposes to exclude investors from Isa while introducing a 180-day notice period, they are all likely to have high liquidity levels.

“Obviously, if the FCA sides with the Bank of England and says these funds have to go to a notice period because they have a liquidity mismatch, then that’s a whole new ball game, which is going to cause real problems. “

Liquidity remains in the foreground

Until then, it looks like liquidity remains an issue that will bother open-ended real estate funds which have recently been draining cash.

Mayfair Capital non-executive chairman James Thornton said daily-traded fund figures paint a negative picture for commercial real estate, with outflows of £ 128million in January, £ 314million in February and a record £ 589million in March.

“We believe this activity is driven more by structural issues with these funds than by pessimism towards the asset class,” he says.

Thornton welcomes FCA’s proposals to exclude investors from Isa and increase the notice period.

He adds, “Retail investors may think that real estate investment trusts are a more attractive way to gain exposure to commercial real estate if they are willing to accept the risk of higher volatility in exchange for it. instant liquidity.

“UK Reits, particularly those with little or no retail exposure, have performed well this year with 3-4% returns available. However, since they are investment funds, they trade at a premium or a discount, whereas daily traded funds are valued on the basis of net asset value under normal conditions. “

Growth protected against inflation

Cohen & Steers, head of European real estate and Rogier Quirijns, senior portfolio manager, believe that in an environment dominated in recent years by Brexit, the euro crisis and the coronavirus pandemic, investors are avoiding illiquid assets .

He says Reits offer an alternative for investors on the fixed income side who want to supplement their portfolio with income that can grow and is protected against inflation.

“For this reason, we see a huge opportunity for retail investors – and in this regard, we want to expand into the European retail market. “

He adds: “Open-end funds which have historically been more popular with retail investors in Europe remain under great pressure due to their illiquid nature, lower yield and higher risk profile. We would say these funds are less diversified regionally and across the real estate sector and at the same time are illiquid – a toxic mix in today’s environment. “

PGIM Global Select Real Estate Securities fund manager Rick Romano said valuations in most of Reit’s sub-sectors were below historical averages across the world and reverting valuations to averaging would provide an advantage. .

Second, he adds, Reits offer a relative value opportunity compared to other risky assets. “The panic selling at the start of the pandemic caused a significant drop in prices, which have not yet fully recovered,” he said.

Finally, Romano believes that a stable interest rate environment has generally been favorable to real estate returns.

“With low and apparently stable interest rates, real estate should be a sector that offers both strong returns and total returns. “

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