News broke last Monday that Henderson Global Investors (Henderson) had switched its £4bn Henderson UK Property fund to a bid price from its previous offer price. Henderson’s move sparked a chain reaction which resulted in M&G Investments (M&G) switching the pricing basis of its £4.6bn M&G Property Portfolio and Standard Life Investments (SLI) its £1.5bn SLI Ignis UK Property fund, all in the span of the same week.
By making the switch from offer to bid, Henderson slashed prices by 5%, M&G took a cut of 6.5% and SLI’s price decreased by 5.51%.
The three asset managers all cited increased redemptions as the catalyst behind the move.
All three insisted that their decision was not an admission of a liquidity problem. Rather, this switch was a reflection of current net inflows.
Or as Rowan Dartington Signature’s Guy Stephens put it: “A sign that they are experiencing redemptions to such a degree that they need to protect longer term investors in the fund and try to dissuade investors from redeeming.”
Pros and Cons
The switch from offer to bid price is nothing the industry hasn’t seen before, said Morningstar portfolio manager, Simon Molica. “These asset managers would say that they’re treating existing customers fairly. If investors are in a position to sell their holdings, the fund managers are trying to ensure the general associated costs of acquiring and disposing of property doesn’t get borne by existing shareholders only.”
Square Mile Investment Consulting & Research (Square Mile) head of research, Victoria Hasler, added: “Property is a very expensive and illiquid asset class. Investors entering into the fund should know that property is not a short-term venture, it’s a long-term strategic part of your portfolio.”
Also, while there’s a 6.5% swing in unit price currently, that should swing back at some point, for those investors who choose to stay the course, Molica added.
To this point, managing director of FundCalibre, Darius McDermott, added: “If you’re a long-term investor, you won’t really see the difference of an increased charge and, anyway, it’s a temporary change.” The obvious con is that investors who choose redemption are going to incur an exit fee, McDermott stated.
Molica also cautioned that since the new stamp duty land tax (SDLT) changes had come into effect the “spread” or the difference between the value of the assets on an offer basis versus a bid basis was now over 6%. The pricing volatility is larger in the swing for that reason, he explained.
Stephens said the move is symptomatic of the fact that “clearly there are changes afoot,” and that these changes have more to do with “the evolving nervousness around Brexit rather than a fundamental shift in the outlook for the sector.”
“Commercial property is a cyclical sector but it tends to move in long, drawn out, cycles and is correlated to economic growth as this is what drives demand. Investors are withdrawing from the sector, not in anticipation of imminent recession, but more as trepidation sets in ahead of Brexit,” he stated.
McDermott adopted a similar stance, adding that “the redemption we’re seeing is simply a reminder that property is an illiquid sector.”
Furthermore, this kind of investor behaviour is something we’ve observed before, said McDermott. “The same thing happened in the months leading up to the Scottish referendum. People delayed their property purchases. It’s driven by uncertainty, but there’s no need to panic,” he stressed.
Hasler also refused to take a pessimistic view: “Property funds still provide income for investors so there’s something to be said for that. While returns are slowing down, there are still decent returns to be had. Most managers are talking about 5-7% over the next few years, which isn’t really terrible in the grand scheme of things.”
And of course, Hasler says it’s worth asking: “What else are investors going to put their money into ahead of the EU Referendum? They’re not going to take it out and hold huge amounts of cash. It’s not obvious at this point what they should alternatively invest in.”