M&G Investments has suspended its open-ended UK property fund as it seeks regulatory approval to close the vehicle.
The move comes after years of dwindling assets following the most recent raft of retail property funds suspensions, which saw most UK open-ended property funds shutter, citing material valuation uncertainty as a result of Covid-19.
M&G Property Portfolio, however, suspended its redemptions earlier than most, applying the restrictions in December 2019, attributing the move to "Brexit-related political uncertainty and ongoing structural shifts in the UK retail sector".
At the beginning of 2019, the fund held £3.5bn in assets under management, which fell to £2.5bn at the time of suspension.
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Following a 17-month suspension, the fund reopened with a cash level of 33.2% in order to manage redemptions.
Since this was lifted, AUM has continued to dwindle on the back of consistent redemptions, falling roughly three-quarters over the period to just £567m on 17 October 2023, according to M&G's website.
Orders place after midday today (19 October) will not be accepted, and the fund house is seeking regulatory approval from the Financial Conduct Authority to wind up the vehicle.
M&G expects the process to take approximately 18 months, with the first distribution available to investors shortly after FCA approval is granted.
The annual charge on the fund has been reduced by 30% as of today, with all fees on cash held in the fund removed entirely.
Income distributions will be paid as normal.
Speaking to Investment Week, M&G global head of product and distribution Neal Brooks explained the fund closure was a result of structural issues rather than any concerns with management.
He said there was "no reason" to expect the consistent redemptions to slow, and as such the decision to close the fund was made in order not to prejudice remaining investors.
Brooks added the firm "does not foresee a future" for the open-ended direct property structure, and had found no alternative offering investors a comparable product.
M&G had sought to merge the product but found no viable alternative, while investors were not keen on an investment trust structure, wishing to avoid the "equity-like" nature of the vehicle.
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When asked about LTAFs, Brooks explained that while he envisioned the structure would "in time" be a good method for retail investors to access property, it does not currently offer this.
He noted in particular the inability for retail investors to access an LTAF via platforms or to hold it in an ISA.
Brooks added: "When we launched this strategy in 2005, we - alongside our peers - provided access to an asset class which had historically been unavailable to long term savers in a pooled structure. The market has since evolved.
"Declining retail investor interest across the sector for this fund structure, alongside uncertainty around their future composition is posing challenges to the future viability of funds like the M&G Property Portfolio - particularly for those investors who require daily liquidity. We considered various options, but believe this is the right decision for our investors."
The move comes less than a week after Canada Life AM imposed a suspension on its UK open-ended direct property vehicle - WS Canlife UK Property ACS - ahead of its closure.
Ben Yearsley, investment consultant at Fairview Investing, said: "Fund groups are helping the FCA massively by closing their physical property funds - saves them having to actually make a decision on them."
‘Investors will have to be very patient'
Referring to the potential 18-month wind-up process, Ryan Hughes, head of investment partnerships at AJ Bell, suggested investors will have to be "very patient" to have their capital realised, because of both current market conditions, and ensuring a fair price for the assets, rather than falling victim to a fire sale.
"Any potential buyer will now be in pole position in the knowledge that M&G are looking to offload over £500m of property assets into a market that is not exactly buoyant at the moment," he said.
Quilter Cheviot equity research analyst Oli Creasey agreed, citing "lower than average property transaction volumes".
"We note that while the Janus Henderson fund successfully liquidated in short order in 2022, with a single buyer taking the entire portfolio, others have not been so lucky," he said. "Aegon suspended in March 2020, and has been liquidating a relatively small portfolio since summer 2021, a process that is still ongoing."
Emma Wall, Hargreaves Lansdown head of investment analysis and research, described the suspension and closure as "the right decision", owing to the inherent liquidity mismatch.
"Physical property investments are best done in a structure which aligns with the fluctuating liquidity of the asset class - such as a closed end investment trust, where the discount/premium mechanism accommodates for the impact liquidity can have on the value of the assets," she explained.
Hughes agreed: "Offering a daily dealing structure for an asset that can take months to sell was an accident that happened all too often and one that ultimately undermined investor confidence."
Creasey added that, while unsurprising, the closure of M&G's long-standing fund was "a shame".
"Only a handful of funds remain, and while they tend to be the biggest/best, even they have seen shrinking AUM as property values fell in the second half of 2022, and net redemptions reduced portfolio sizes further," he said.
"Will the last one out of daily-dealt property funds, please turn off the lights?"
