Property fund cash levels solid for now, but could be tested if panic sets in

by | Oct 5, 2022

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Following the news around potential liquidity issues with property funds and the IMF’s warning around illiquid assets Oli Creasey, property research analyst at Quilter Cheviot has commented.

 He said: “The liquidity issue facing the property fund sector is as much driven by pension fund issues as anything to do with the underlying investments. That is not to say that property is in rude health at the moment either. It is not and faces a difficult time should we see interest rates continue to be driven higher.

“However, the property funds themselves should stay ahead of their benchmarks and this is good news given the difficult performance that we expect in the short-term. The reason for this is cash. All of the mainstream property funds are expected to hold c. 15-20% of their assets in cash for liquidity purposes. That makes it very difficult for funds to outperform in a rising market but provides a handy buffer in falling ones.

“Investors holding these funds need to be absolutely clear about why they do so. Those holding with a multi-year outlook may see this as something to ride out, but anything less than a two-year time horizon may struggle to make money if the market moves as expected.

“The issue that investors will have to contend with, once again, is liquidity. Thinking about second order effects of falling values, it seems likely that some investors won’t hold their nerve and will head for the exit. Most funds are well covered in terms of liquidity for now, but if panic sets in, none hold sufficient cash to satisfy all potential redemptions. It may only take one small fund to close to see contagion set in.

“This is a serious risk and one that could be easily exacerbated should investors see headlines of property funds gating, suspending or even shutting down. This can cause panic to spread in a sector that is already low on confidence and is increasingly concerned about funds which could quickly become too small to operate.

“Open-ended property, therefore, does remain an option for investors looking for property exposure as part of a wider portfolio. However, risks remain very real in the sector and thus won’t be appropriate for everyone. Investors that can remain in these funds need to be prepared to ride out a cyclical dip, and avoid being spooked if panic sets in.”

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