Fortunately the closure of the M&G Property Portfolio fund didn’t come as a surprise to us. With a high allocation to retail properties at 40%, and significant exposure to the UK’s struggling shopping centres, the fund has seen the valuation of the properties it invests in dropping on aggregate by more than 10% over the last year alone.
A dramatic 7.7% drop in the valuation of the fund’s retail exposure caught our eye and probably led to a number of investors revisiting the case for investing in the fund.
At EQ, we have been extremely cautious with our UK property exposure over the last three years. As such, we avoided being caught up in the closure of a number of open ended property funds in the aftermath of the referendum result in 2016. M&G, Aviva, Standard Life, Threadneedle and Henderson were all forced to suspend their property funds due to high redemption requests.
Since the referendum, we have identified the challenges posed by the ongoing Brexit uncertainty as well as the headwinds that the retail sector is facing. As a result we have been underweighting the property sector in our portfolios. We have favoured closed end funds (also called investment trusts) as their capital structure are more adapted to illiquid assets like direct property.
In the past year, we have become even more cautious on the asset class for a number of reasons. Transactions in retail property have pretty much come to a standstill. There may well be an upsurge of overseas interest in the sector if the Brexit paralysis can be resolved but probably at a significant discount to current valuations.
A rise in outflows has led to the introduction of swing pricing as well as the sale of some of the best performing assets in the industrial and alternative sectors. And finally, the consultation on illiquid assets by the Financial Conduct Authority could result in open ended property funds closing on a more regular basis.
Whilst we are keeping a close eye on the sector, for the time being, we see more attractive prospects in other asset classes.
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