Dramatic outflows from UK retail open-ended property funds has led to discounts widening of the closed-ended listed UK Property Investment Companies (PICs), with some funds discounting as low as 25%, according to research undertaken by Numis Securities.
Following this week’s developments in the UK property world, as reported, demonstrated by Standard Life suspending redemptions on 4 July on its £2.7bn real estate fund following an increase in redemptions and followed by the £4.7bn M&G Property and £1.8bn Aviva Investors property fund suspending redemptions on 5 July, Numis points that the property asset class as a whole is currently being affected.
And despite PICs being closed ended offerings, the impact has been felt with discounts widening to as much as a quarter of the share price in some cases.
“The scale of the outflows in the property sector highlights the issues with open-ended funds holding illiquid assets classes that do not match the fund’s own redemption terms, said Ewan Lovett-Turner, director, investment companies research at Numis Securities. “In addition, Aberdeen, Henderson, M&G, L&G, and Standard Life have made valuation write-downs of 3.75% to 5% to reflect the post Brexit environment.
Peer group average 14% discount
“The turmoil in the property market has been reflected in the discounts widening of the listed UK PICs. The peer group average discount is currently 14%, although a number of the large funds are trading in excess of 20% discount, including UK Commercial Property (22%) and F&C Commercial Property (25%),” he said.
Lovett-Turner points that the combination of modest leverage and a lack of redemption pressures mean that UK PICs do not need to sell assets, unlike some of their open-ended peers.
However, discounts/premiums of UK PICs tend to be correlated to general investor flows and after a few years of increasing allocations to the property sector, the fact that investors in their droves are now trying to withdraw capital, the impact is being felt in the closed-ended marketplace as well.
Despite general concerns in the sector, Lovett-Turner believes that the situation is different than it was during the 2008 commercial property crash and that significant discounts could present a buying opportunity for investors.
“It is difficult to know exactly where discounts will bottom,” said Lovett-Turner. “And in the short-term it is difficult to swim against the tide of open-ended outflows which are likely to put continued pressure on capital values and discounts of PICs.
“Importantly, though, the fundamentals are different from 2008 and we believe that discounts in excess of 20% represent a buying opportunity given the yield support.”
Using data from Morningstar on estimated daily net flows from open-ended funds and comparing against closed-ended funds PIC primes/discounts, Numis has produced a comparative chart to highlight the correlation.