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St James Place and M&G property funds suspended

We wrote last month about the fortunes of commercial property.  While commercial property has fallen in value over the last few years, this does not make it a bad investment and we expect it to remain a source of good long-term returns.

Last month however, we were also reminded that the way property as an asset class is accessed is extremely important.

9th November 2023

An announcement in October was made by St James Place that it had taken the decision to suspend redemptions on its £900 million Property fund. Reasons for the suspension included a fall in demand for commercial property, office space remaining vacant and a rise in redemptions / fall in investment for the fund.

Only days before, M&G had taken the decision to close its £800 million Property Portfolio. In a statement to investors M&G stated, ‘We believe withdrawals from the fund are likely to continue and there is risk this may accelerate in the future.’ The firm added that it would need to sell larger properties and buy smaller ones as the fund shrank further – something that would incur high transaction costs and hurt performance.

We have covered previously the evident dangers of a liquidity mismatch between the terms of exit from a fund and the underlying assets that the fund has invested in.  If it is likely to take six months to sell a retail shopping mall, for example, but a fund has promised you your money tomorrow, the problem is glaringly obvious.

We saw similar suspensions during the Credit Crisis, in 2016 after the Brexit vote and in the aftermath of Covid. Each time, a number of the UK’s property funds investing directly in bricks-and-mortar were suspended when they became unable to meet redemptions from liquid assets.

For over a decade now our portfolios have held Real Estate Investment Trusts (REITs), rather than bricks-and-mortar funds. A REIT is a property investment company with special tax rules to very broadly, simulate (from a tax perspective) direct investment in UK property. They are listed on global stock markets, and shares in the company are freely tradeable and easily realisable as opposed to bricks and mortar. Using REITs in our portfolios avoids liquidity issues and helps diversify across a wide range of countries, commercial property sectors and properties.