In what will seem like yet another case of déjà vu for property investors, one of the biggest open-ended funds in the market has decided to suspend dealing in its shares and shut up shop.

This move brings into question the future of this type of property fund given the inherent structural problems it has.

Several open-ended funds suspended dealings in the aftermath of the Brexit vote in 2016 and again following the outbreak of Covid in 2020 due to the inability to liquidate their assets quickly enough to meet customer withdrawals.

In May 2021, Aviva Investors, part of the UK’s largest insurance firm Aviva (AV.), threw in the towel and closed its £370 million UK Property Fund after it had been frozen for more than a year.

Now, M&G Investments has announced its intention to close the £565 million M&G Property Portfolio (Acc: B8FYD92 Inc: B89X8P6) – which was suspended in 2020 but reopened in 2021 – ‘due to declining interest in open-ended daily dealing property strategies from UK retail investors’.

Blaming lack of investor interest and ‘persistent outflows over several years,’ M&G says the fund’s reduced size meant the manager couldn’t run a diversified portfolio without incurring the high ongoing transaction costs required to reconfigure the portfolio.

As of the end of August, the fund was around 75% invested in physical real estate assets with just under 20% in cash and the remainder in quoted equities.

Among the top 10 assets were industrial and office properties in Aberdeen, a retail warehouse in Llanelli, and a shopping centre, leisure centre and industrial park in North Kent.

M&G says once regulatory approval has been granted, the fund will begin the orderly sale of its assets with the aim of ensuring a fair market price but it expects the process to take around 18 months.

Cash will be returned to clients ‘when it becomes available through this period’, while normal income distributions will continue to be paid in January, April, July and October.

Ryan Hughes, head of investment partnerships at AJ Bell, says: ‘The writing has been on the wall for open-ended property funds ever since they suspended again in the depths of the Covid crisis. 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.

‘The FCA looked to address the issue through tentative proposals to limit access but while this was a potential solution, the likelihood was always that retail investors would want the comfort blanket of daily dealing even if they didn’t need to access the asset.’

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor of the article (Tom Sieber) own shares in AJ Bell. Steven Frazer also owns a personal interest in Scottish Mortgage and Smithson Investment Trust.

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