Property funds build Brexit cash buffer as outflows soar

Property funds have seen consistent outflows over the past year, as UK retail investors have withdrawn more than £4bn of money from the leading UK direct property funds. Worries about the Brexit impact on property values have made investors nervous, as well as concerns about liquidity in the funds.

The level of outflows from some of the property funds will be alarming for investors, with some losing half their assets over the past year. This will also have a knock-on effect on cash levels, as managers use cash reserves to hand back money to investors.

It’s a tricky balancing act for property funds at the moment to ensure their cash levels are right. As the sector has seen consistent withdrawals these funds need to ensure they have sufficient cash to pay investors wanting to redeem their money. However, as cash is earning next to zero returns, if the fund has too much in cash it will seriously hit the fund’s performance, with investors continuing to pay the normal fund charge on the entire amount invested.

For example, the BMO UK Property fund has 30% in cash, which means almost a third of the assets in the fund are earning minimal interest. For an investor with £10,000 in the fund, it means £3,000 of their money is not invested in property and instead is sitting in cash.

However, considering the level of redemptions in the property sector, some investors might be nervous about their fund having less than 10% in cash – if the fund saw a large level of withdrawals they could quickly run out of cash.

It’s worth noting that cash levels can change each month, so investors should look over the longer term too. Because the assets held in these funds are sizeable, the sale of just one building can result in a big boost to cash levels. Likewise buying a single property can eat into a large chunk of cash reserves.

The City regulator has finally proposed new rules on property funds, following the suspension of many in the sector during the turmoil following the Brexit referendum more than three years ago. It backed down on previously proposed plans to force property funds to cut their large cash allocations, but it has decided that funds must suspend if they are uncertain about the value of 20% or more of their assets, meaning we’re likely to see more funds suspend more frequently.

Diggelmann faces a tricky task of balancing the need for continuity with a likely ambition to bring his own ideas to the role.

Fund Cash Holdings Outflows over 1 year (M) Fund Size (£) Outflows as a percentage of fund size Ongoing Charge Yield 1-year return 3-year return
BMO UK Property 30% (£27.3) £512.8 (5%) 0.83% 2.9% (5.2%) 6.0%
L&G UK Property  30% (£374.2) £3,234.7 (10%) 0.75% 2.2% 2.50% 20.3%
Janus Henderson UK Property 27% (£870.0) £2,270.5 (28%) 0.84% 3.0% 2.30% 17.5%
Kames Property Income 21% (£47.0) £537.5 (8%) 0.82% 5.1% (3.3%) 15.5%
Aberdeen UK Property 12% (£1,395.6) £1,431.8 (49%) 0.90% 2.7% -4.10% 8.4%
Threadneedle UK Property 8% (£243.8) £1,276.3 (16%) 0.80% 4.5% (5.3%) 11.7%
M&G Property Portfolio 6% (£937.9) £2,790.5 (25%) 0.79% 2.8% (2.6%) 10.5%
SLI UK Real Estate NA (£295.7) £1,677.7 (15%) 0.90% 3.7% (0.5%) 13.0%
Average 19% (£523.9) £1,716.5 (20%) 0.80% 3.4% -2.00% 12.9%

Source: Morningstar/FE/AJ Bell. Current data to end of 08/2019

These articles are for information purposes only and are not a personal recommendation or advice.

ajbell_laura_suter's picture

Laura Suter is Personal Finance Analyst at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.