Archived article
Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
With lockdown life continuing in the UK and the property market having all but ground to a halt, investors won’t be surprised that all physical commercial property funds remain closed. With potential buyers unable to view properties or survey them the commercial property market isn’t going anywhere, which means the valuers of the underlying assets don’t have enough certainty about what property funds’ holdings are actually worth to be able to attach a price to them.
In order to improve the cash position of the fund, M&G needs to offload properties and says it has almost £200m of property under offer, but warns there is ‘no guarantee’ that these transactions will actually happen – until then it can’t build up cash reserves and so can’t re-open for investors.
This isn’t likely to be a problem solved overnight, particularly when you consider that even once lockdown restrictions are eased and the property market can pick-up again a number of businesses will have failed and no longer need premises while the future of office space has a large question-mark over it as more people adopt working from home practices.
M&G has also warned of a hit to income, as it collected less rent in March – a trend that is likely to continue into the summer. This is another blow to income investors who have already been hit with dividend cuts across the stock market.
Considering the environment, investors will also face a sharp reduction in the value of the assets when the funds do re-open. Currently direct property funds are only down around 3% year-to-date, but many real estate investment trusts are down a much sharper 25% to 50% and trade on wide discounts to net asset value. As a result, investors in the suspended funds should brace themselves for potential sharp falls in values once property transactions pick up and valuers have a sense of how much commercial properties are now worth in a very different economic environment.
Read the update on the suspension of M&G's property funds here.
These articles are for information purposes only and are not a personal recommendation or advice.
Written by:
Ryan Hughes
Ryan Hughes, Investments Director - AJ Bell Investments
Ryan started his career in 1999 working for an independent financial adviser, progressing to become Head of Portfolio Management at an award-winning advisory firm. Ryan then joined a global asset management firm as a Fund Manager, where he oversaw more than £10bn of multi-asset portfolios and also sat on the investment and global asset allocation committees. After seven years, Ryan joined a small multi-asset boutique managing portfolios for clients all around the world, before joining AJ Bell in 2016 to help establish our investment capability and overseeing all investment research for AJ Bell. In 2022, Ryan was appointed as Head of Investment Partnerships with responsibility for managing bespoke portfolios tailored to specific adviser needs and then in 2023, Ryan was made Investments Director with oversight of AJ Bell’s investment capability.
Ryan is a member of the CFA UK Society, is frequently asked for his views in the press and on panel debates while also being recognised as one of the leading fund researchers in the UK.
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