Open-ended property funds have notched up a positive intake of cash for the first time in nearly four years as UK investors overlook recent issues to focus on the sector’s defensive qualities. 

After a record 44 months of consecutive withdrawals, property funds welcomed £134m of new capital through the door in June, according to funds settlement service Calastone’s estimates.

Largely powered by a giant Legal & General strategy, it follows the mass gating of real estate funds in early in 2020 as the pandemic scotched liquidity and threw the valuation of assets into uncertainty. This led to major outflows or outright closures once funds could reopen to trading, with ongoing concerns about the ‘liquidity mismatch’ between daily dealing and bricks and mortar. 

Those trends may now be reversing, Calastone reported, noting declines in property sector outflows since early 2022. Highlighting a ‘decisive reversal’ towards inflows in late May, the group said June’s positive figures reflected a wave of new buyers rather than the reduction in sellers that has characterised improvement in recent months.

‘Property is a yield asset. Rental income is a bit bond-like because commercial tenants tend to have relatively long leases and will look to cut other costs before facing the upheaval of a move. As an asset-backed income investment it therefore looks relatively attractive in today’s environment,’ said Edward Glyn, Calastone’s head of global markets.

‘But it is not immune. Capital values are sensitive to rising interest rates and a severe recession would inevitably lead to stress among tenants in more cyclically exposed segments like retail or offices, in contrast to more stable segments like healthcare.’

The property inflow came in the context of UK investors pulling £1bn from equity funds in June, according to Calastone, which scales up the monthly estimates from the two-thirds of transactions by UK investors that take place across its network.

It was also the real estate sector’s best single month since June 2015, a year before the Brexit vote set off a prior round of heavy redemptions and funds suspending trading. 

Funds in focus

 The L&G UK Property fund took the lion’s share of inflows, winning a net £116m in June, according to Morningstar data, following £18m in May.

The £2.3bn portfolio of physical managed by Michael Barrie and Matt Jarvis had recorded outflows every month this year before May, despite beating its Investment Association UK Direct Property benchmark consistently over the past 12 months, according to L&G data. 

Another open-ended vehicle that enjoyed inflows was the £328m Columbia Threadneedle UK Property fund managed by Guy Glover. Formerly the BMO UK Property fund, it saw £11m slide onto the doormat in June, following inflows of £4.4m and £6.9m in May and April respectively.

At the other end of the spectrum, the £396m Columbia Threadneedle UK Property Authorised trust managed by Gerry Frewin saw the largest June outflows in the UK Direct Property sector, estimated at £30m. 

The signs of a resurgence for open-ended property funds comes as many real estate investment trusts (Reits) have suffered widening share price discounts in recent months, suggesting something a potential disconnect.

Another Columbia Threadneedle mandate, the £414m CT Property Trust (CTPT ) managed by Peter Lowe, is currently trading at a 40.2% discount to net asset value (NAV), according to broker Numis Securities. The discount had stood at 26.5% at the end of March, according to the recent factsheet. 

Specialist sectors like e-commerce logistics have also been battered. Tritax Big Box Reit (BBOX ), the £3.4bn sector giant, is trading at a 22.6% discount after its biggest customer, Amazon, suggested it was pausing its expansion of warehousing and logistics space.  Peers were also caught up in the resulting selloff, with Tritax EuroBox (EBOX ) now trading on a 31.6% discount and Warehouse Reit (WHR ) a 14.7% discount.

Though their share prices can be volatile, with a fixed pool of capital Reits do not suffer the same underlying liquidity concerns as open-ended funds. 

Record UK outflows

More broadly, UK-focused equity funds also set another new monthly record for outflows, which reached more than £1.1bn in June, Calastone reported. Over 13 consecutive months of selling they have now leaked £6.4bn. 

Index-tracking passive funds have also seen sentiment dip, suffering their second-worst month on record for flows in June. Since January, outflows have totalled £2.6bn, contrasting with £633m of inflows to active funds.

Environmental, social, and corporate governance (ESG) equity funds, which tend to be actively managed, have driven much of this difference. They have recorded inflows of £2.3bn year to date and enjoyed another good month in June, with inflows of £292m.