Property funds build Brexit cash buffer as outflows soar

Laura Suter
21 October 2019

•          Cash reserves have hit 30% for some funds
•          Outflows from UK Direct Property funds total more than £4bn
•          Average return over 1 year is -2%

Laura Suter, personal finance analyst at investment platform AJ Bell, comments:

“Property funds have seen consistent outflows over the past year, as UK retail investors have withdrawn more than £4bn of money from the leading UK direct property funds.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.”

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%

2.5%

20.3%

Janus Henderson UK Property

27%

-£870.0

£2,270.5

-28%

0.84%

3.0%

2.3%

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%

-4.1%

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%

0.8%

3.4%

-2.0%

12.9%

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

Laura Suter
Director of Personal Finance

Laura Suter is director of personal finance at AJ Bell. She is a spokesperson for the company on a range of personal finance topics and is quoted in print media and regularly appears on TV and radio. She is also a founding ambassador of AJ Bell Money Matters, a campaign to get more women investing and engaging with their finances; she hosts two podcasts; and regularly speaks at events and webinars. Prior to joining AJ Bell she was a multi-award winning financial journalist, specialising in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications in London and New York and has a degree in Journalism Studies from University of Sheffield.

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