Restrictions on Redemptions Are Not Stopping Net Outflows on the Back of Gloomy Economic Predictions
By Paul Norman
7 February 2023 | 10:07
Rising interest rates and a poor outlook for the economy mean UK property funds have seen more outflows at the beginning of the year.
Investors sold a net £48.3 million of their holdings in January, the sixth consecutive month of outflows, according to global funds network Calastone’s latest Fund Flow Index
That follows years of outflows since mid-2018 that were only briefly relieved in mid-2022 with a small window when there was a flurry of buying.
Asset managers have been limiting withdrawals by institutional investors from major UK property funds in response to the economic turmoil that followed the Liz Truss government’s mini Budget in September.
Edward Glyn, head of global markets at Calastone, says there is no end in sight for property fund outflows for the time being, despite the limits placed on redemptions.
“Investors are re-evaluating the prospects for the property market in the face of higher interest rates and expectations of a recession in the UK. After raising rates on Thursday, the Bank of England has raised hopes that interest rates may be at, or at least near, their peak – but outright cuts are some way beyond the horizon yet. It’s hard to see a decisive turn of sentiment until they begin.”
Glyn adds that the imposition of restrictions on redemptions is entirely sensible in the short to medium term it means the structure of property funds is in in step with the “liquidity profile” of the underlying investment, which are often slow to sell. But he points out that investors do not like these limits and this may damage the sector longer term.
“There’s no easy option. Those who opt for closed-ended investment trusts may be sure of liquidity but this comes at the cost of big discounts to asset value in bad times. The real answer, of course, is that investors should treat property as a long-term investment that they hold throughout the economic cycle, rather than attempting to titrate their exposure with every drop of economic news.”
The value of buy orders rose to its highest level since August (£98 million) but selling pressure also rose month-on-month to £146 million in January. This mismatch caused net outflows to rise.
As an asset class property was not alone in suffering. UK-focused equity funds suffered their third-worst month of outflows on record in January with investors withdrawing a net £868 million from their holdings.