Real estate fund outflows reach 'unprecedented' €3b over past year

Outflows from real estate funds accelerated in November, lifting total withdrawals since October 2018 to an 'unprecedented' £2..5 bn (€3 bn), according to the latest Fund Flow Index from global funds transaction network Calastone.

Real estate funds this November suffering their third worst month this year so far, with £251 mln leaving the sector, up from £208 mln in October and £179 mln in September, and marking a record 14th consecutive month of outflows.

At 28.1, the Calastone FFI:Real Estate registered its fourth worst month on record in November (a reading of 50 means inflows equal outflows), and has performed worse than any other asset class all year in 2019.

The report comes as M&G just announced the temporarily suspension of dealing in the shares of its M&G property portfolio and feeder fund with immediate effect. The UK-headquartered firm said on Wednesday that in recent months, 'unusually high and sustained outflows from the M&G property portfolio have coincided with a period where continued Brexit-related political uncertainty and ongoing structural shifts in the UK retail sector have made it difficult for us to sell commercial property'.

The M&G property portfolio is a broadly diversified fund which invests in 91 UK commercial properties across retail, industrial and office sectors on behalf of UK retail investors. The fund manages assets of £2.54 bn (€3 bn) as at 31 October 2019.

The new is likely to put investors on high alert for copycat closures, according to market experts. 'Investors in other property funds are likely to be spooked by the news that one has suspended,' commented Edward Glyn, head of Global Markets at Calastone. 'A sudden rush of redemptions on top of the ongoing trends of outflows may well mean other funds judge it appropriate to close for a time too.’

Two-fifths of the UK’s commercial property is in retail, a sector suffering relentless disruption at a time when economic weakness has depressed sentiment around parts of the commercial property asset class. Outflows are the inevitable result, added Glyn. 'Real-estate funds are now caught between a rock and a hard place. To cope with consistent outflows, they must hold very high cash balances, of as much as 30% in some cases. Paradoxically high cash weightings may themselves be causing further outflows as investors shun the notion of paying management fees on holdings that are not fully invested in their chosen asset class. Property is inherently relatively illiquid, so regulatory change enabling open-ended property funds more flexibility around managing outflows may help, but the timing is bad.'

The move by M&A recalls the wave of fund suspensions in the wake of the Brexit vote in 2016, when seven UK property funds temporarily ceased trading to halt rapid outflows.
At the time, fund managers including Aviva Investors, Aberdeen, Henderson, M&G, Standard Life Investments and Columbia Threadneedle suspended dealings in the UK for up to six months, gating funds worth nearly £20 bn in total.

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