The past few weeks have seen yet more news on the suspension of withdrawals from two well-known property funds in the UK – M&G Property Portfolio and Prudential UK Property.
If you are suffering from ‘déjà vu’, that’s perfectly understandable as we’ve been here before. Back in 2016 to be precise, just after the Brexit result.
Market uncertainty, whether caused by Brexit, President Trump’s tweets or other influences, has caused some concerned investors to ask investment fund managers for their money back.
The main problem when this involves property funds is this: you could be the richest person in the world, but if it’s all tied up in physical ‘bricks and mortar’, you can’t readily spend and enjoy your wealth. Property is ‘illiquid’. Without recourse to borrowing, you can’t withdraw a relatively small sum of say £5,000 at short notice, like you can from a cash account or a diversified bond/equity portfolio.
When there is a high demand for withdrawals from bricks and mortar property funds, the funds need to make enough cash available to satisfy all those requests. Once any cash holdings in the fund have been exhausted, the fund manager has to physically sell one or more of the underlying assets. Just as it was after the Brexit vote, bricks and mortar funds have recently been struggling to keep up with investors’ withdrawal demands. Just like in 2016, some funds have been forced to suspend withdrawals until such time when sufficient cash has been generated by property sales. Such decisions are taken by the fund house and investors have no control over when this happens.
Withdrawals are temporarily suspended to avoid fund managers having to sell property in a hurry, which could mean having to accept a knock-down price, which in turn would penalise the remaining investors. In effect, delaying withdrawals buys time and allows the manager to meet withdrawals from normal cashflows, rather than being forced to sell property at a bad time.
By investing in Real Estate Investment Trusts (REITs), Carbon clients avoid this trap by owning shares in a diversified global portfolio of highly-liquid, listed real estate companies. This enables them to access the returns from property as an asset class in a much more liquid way. REITs are valued daily instead of, say, once a month (which is typical of traditional bricks and mortar funds) and can be sold whenever investors want to withdraw funds. This allows for good exposure to property for investors, but with access to capital when needed.
When Carbon clients want their money, we make sure they can get it.
Iain Harper is a Financial Planner at Carbon. Contact Iain via email on email@example.com.
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