The open ended real estate funds market faced its latest challenge this week following the suspension by M&G of its property fund.
We have been here before, most recently in the aftermath of the 2016 Brexit vote, but it feels different this time. Open ended funds and their investors have faced a tough time over the few months, with the Woodford Equity Income Fund closing. However the circumstances of the latest setback seem different.
The uncertainty for the commercial real estate market created by Brexit and the woes of the retail sector in particular were cited as factors behind the decision to suspend redemptions. Yet while these are both well documented, research and commentators both indicate that UK real estate should be fundamentally sound in the long term.
The issue is that investors and managers face is the quandary inherent in a product investing in hard to sell assets but allowing for daily dealing of interests. Once investors start heading for the exit, there is significant danger of the fund not having sufficient cash to meet redemption requests and, as a result, needing to sell assets. The market would clearly identify such a distressed seller, driving down pricing. The manager would have various duties to balance – what about investors who want to stay in the fund but face the fund selling its best assets to allow it to pay those that exit? Real estate funds seem to have learnt from the lessons of the past, with some of the largest managers, reassuring the market that they had sufficient cash reserves.
Then there is the danger of herd mentality. With conservative estimates of net outflows from real estate funds in 2019 being close to £1 billion, will this gating be the first in a series?
What is clear is that the next few weeks, with the general election, a busy retail period and the possibility of further fund suspensions, will go a long way to setting the backdrop for the real estate funds market in 2020.
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