M&G Property Fund remains suspended
The fund was suspended on 4 December 2019 due to high levels of withdrawal requests by investors at a time of Brexit uncertainty and structural shifts in the UK retail sector.
In an update today M&G said: “The Authorised Corporate Director of the M&G Property Portfolio (“the Fund”) has decided, with the agreement of the Fund’s Depositary, it can best protect the interests of all its investors by continuing the temporary suspension in dealing in its shares.
“The Fund’s Standing Independent Valuer – Knight Frank – also continues to apply a statement of Material Uncertainty to their valuation because of the reduced transactional evidence available on which to base valuations.”
Given the UK lockdown from mid-March, transactions in commercial real estate have largely stalled, as a result of investors’ inability to travel, inspect properties and undertake physical due diligence.
The fund has approximately £197.4m under offer for sale, albeit with reduced certainty of completion whilst social distancing measures continue.
Tony Brown, global head of M&G Real Estate, says: “Although there is a significant amount of capital waiting to enter the market, for practical reasons we are seeing a considerable slowdown in capital markets activity and it is likely to be some time before investment volumes recover to more normalised levels. In the interim the fund management team remains focused on actively managing the portfolio through this challenging period.”
M&G says the fund continues to be actively managed during suspension, including income payments and fund reporting. Given the fund’s lower rent collection for the March quarter compared to previous quarters, M&G expects a corresponding reduction in the level of income distributions.
M&G also continues to waive 30% of the fund’s annual charge in recognition of the inconvenience caused to its clients and customers.
Ryan Hughes, head of active portfolios at investment platform AJ Bell, says: “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.
“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.”
The next update about the fund will be on 16 June at the latest.