As the UK creeps closer to ‘Brexit day’ without an exit deal in place, investors are fleeing domestic assets, with property funds the latest casualty.
Despite being the best-performing Investment Association sector in 2018, with the average fund returning 2.86%, the IA UK Direct Property sector has seen two successive months of net outflows.
In the immediate aftermath of the referendum on the UK’s membership of the European Union, open-ended property funds saw a raft of panic selling as investors worried about the impact Brexit would have on the sector.
As a result, many of the funds suspended dealing, locking unitholders in or penalising them for withdrawing their capital. This served to ensure a fire sale of assets was not needed by the funds in order to service meet redemptions.
As we approach March 29, the date the UK will exit the EU with or without a deal, the memory of this episode looks to be spurring retail investors into action. In December and January, investors withdrew £1.3 billion of cash from funds investing in UK property assets.
The Aberdeen UK Property Feeder fund saw most outflows in December and January, followed closely by M&G Property Portfolio and Janus Henderson UK Property PAIF.
Fears still abound over how the property market will react to a no-deal Brexit – which still is far from off the table.
Brexit concerns, allied with structural headwinds in retail, have already torpedoed a potential takeover of shopping centre owner Intu (INTU) in November. Last week, Intu scrapped its dividend, while rival Hammerson (HMSO) on Monday said it would continue to offload properties in order to reduce debt as it reported a full-year loss.
Is Property No Longer a Safe Haven?
Data for commercial property does not make for great reading, either. Commercial property investment for January 2019 totalled just £2.6 billion, according to deals database Property Archive. That was the weakest month since June 2016.
Further, there were just 80 investment deals completed in January, which was the lowest month since late 2012 and pushed the 12-month rolling average to its weakest level in five years.
Research firm Capital Economics notes that this uncertainty is expected to be temporary, but expects it to continue to weigh through 2019.
The Financial Conduct Authority’s ongoing consultation into investing in illiquid assets may also have focused investors’ minds toward the benefit of closed-end structures as a way to access property.
Data from Barclays Smart Investor showed Standard Life Investments Property Income Trust (SLI) was one of its most-popular investment trust buys in January. Tritax Big Box REIT (BBOX) and Regional REIT (RGL) were also in demand.
But Adrian Lowcock, head of personal investing at Willis Owen, thinks open-end property funds are less likely to feel the need to close this time around. This is largely because investors and fund managers are more aware of the possibility of it happening, so have plenty of time to act - which they seem to be doing.
John Goodall, head of private client research at WH Ireland, says he’s also been cutting his UK property exposure, despite having been constructive on the asset class previously.
True, it should still look attractive as an income play, with rates set to stay lower for longer. But “it’s not the safe haven that we might have thought it was”, he explains. But he doesn’t think Brexit is the issue; more the challenges facing the retail sector.
Goodall says he’s looking to replace his property exposure with alternatives. “Holding an array of multi assets and having some hedges in place makes sense at the minute.”
Brexit Britain Still Out Of Favour With Investors
It’s not just property that negative Brexit sentiment is hitting in 2019. January marked the highest monthly net outflows from the IA UK Gilts sector since October 2016 at £150 million. In the two months previous, outflows totalled a further £88 million.
Two tracker funds, in iShares UK Gilts All Stocks Index and HSBC UK Gilt Index funds, led the way with Threadneedle Sterling Bond fund following.
Gilts did help provide much needed insurance against last year’s equity market falls, with the FTSE GBI Index returning 0.36% versus a fall in the FTSE All-Share of 8%.
Still, Morningstar Investment Management have low conviction in the asset class, noting that UK Gilts currently have “abnormally long duration risk” and offer low reward for risk in a long-term context.
Dean Cheeseman, a portfolio manager within Janus Henderson’s UK-based multi-asset team, says the funds he runs have taken profits from Gilts recently, with yields having fallen a third since October.
While Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond fund, expects linkers to outperform conventional Gilts in the event of a disorderly Brexit, Terence Moll, chief strategist at 7IM has a more optimistic outlook.
“If Brexit negotiations go horribly wrong, Gilts are likely to see panicked safe-haven flows,” Moll explains.
Elsewhere, the IA UK Equity Income sector saw continued outflows, of £500 million, in January. But that was mainly confined to the Jupiter Income fund.
