In October 2023, three open-ended UK property fund closures and suspensions were announced by St James’s Place (SJP), M&G Investments and Canada Life.
UK property funds had been experiencing outflows since 2018.
According to Calastone, which claims to be the largest global funds network, during this five-year period only one quarter (Q2 2022) saw inflows into UK property funds.
Meanwhile, Morningstar Direct data showed that 2022 was the year with smallest net outflows observed annually since 2018.
Quilter property research analyst Oliver Creasey told Money Marketing the market is “far from good” adding that “no-one has launched an open-ended property fund in years”.
Creasey said Quilter still makes use of these funds, but they are becoming “less and less popular”.
Quilter is more in favour of real estate investment trusts (REITs) as the “closed-ended side looks a lot cheaper” – and Creasey prefers the structure of REITs.
In general he believes the property market is in a “bad place” mainly due to rising interest rates and “what happens now depends on the Bank of England (BoE)”.
When interest rates “start falling it may become more attractive to invest in property”.
He does believe there is a risk that in five years’ time the open-ended property funds may drastically shrink.
However, for the time being Quilter is comfortable suggesting these funds to “sensible clients” and Creasey said it will stay this way.
However, if the landscape changes the company will “reassess the situation.”
Creasey also referenced the long-term asset fund (LTAF) regulation brought in by the Financial Conduct Authority (FCA) as providing “quite loud background noise”.
Altus Consulting head of distribution and product strategy Rory Gravatt also mentioned these rules while talking to Money Marketing.
The LTAF is a category of open-ended authorised fund “designed to invest efficiently in long-term assets” – with the first being launched in March 2023.
As Gravatt explained in March 2022, Janus Henderson UK Property PAIF fund was suspended in part due to the LTAF rules that were incoming at the time.
Gravatt said: “LTAF regulation already saw the likes of Henderson pull out of the property market, and the recent moves with M&G are indicative of a fund type that is not convenient to use within a customer portfolio.”
The LTAF placed more requirements on funds and due to this “cohorts of advisers voted with their feet to move away from these funds”.
Chelsea Financial Services and FundCalibre managing director Darius McDermott added: “Illiquid assets in open-ended vehicles always have the potential for a liquidity mis-match – particularly property.
“The problem is that fund managers can’t dispose of assets fast enough to satisfy investor redemptions during periods of elevated volatility. This leads to fund suspensions and can impact performance.”
In a similar tone to Creasey, McDermott said: “REITs can offer access to various property sectors that used to be the preserve of institutional investors with huge financial resources.”
Creasey did note that it is not impossible that M&G may still be able to sell the property within its fund and make a profit on the sale, which would then mean the shareholder could still also receive a profit on their investments.