M&G Property Portfolio says no to firesale despite need for cash

This is despite the fact that over the past few weeks she has "sometimes felt as if I am swimming surrounded by great white sharks - US private equity. I must have fielded at least 15 phone calls from investors in this industry who think I want to dispose of my assets within five working days - and they'll do it - but want a 15 to 20 per cent discount. So I probably could have sold the entire portfolio by now but it would not have been prudent for my investors to do that."

Over June the fund sold two properties, a shop in Leamington Spa for £6.1m, and a shop at a petrol station in Braintree for £3.3m. A follow-on investment of £9.1m was also made at the fund's development at Tungsten Business Park in Northampton.

Since the vote for Brexit on 23 June the fund has completed on sales worth £20m of assets.

"We would always be looking to buy and sell assets to do re-weightings so had some assets on the market pre-Brexit and continue to put some assets on the market since the vote," explains Ms Rowley. "We've also exchanged on a further £40m of assets all of which were at no discount collectively to pre-Brexit pricing.

We have been actively looking at assets to sell and put a further £65m in solicitors' hands which on aggregate are not at any price less than what they were in the valuations before the vote."

If these complete it will help boost the fund's cash position which at the end of June was 6.7 per cent - just below its managers' desired 7.5 per cent to 12.5 per cent range. M&G is reviewing the suspension on trading every 28 days.

Ms Rowley expects that offices will be the most impacted commercial property sector in the short-term by the vote to leave the European Union. "That is why I have an underweight position to [central London] where I thought there were risks were even a year ago - if there is any shock to this market it could correct because the pricing was already in expensive territory,"explains Ms Rowley. "In my disposals over the next two to three months I will actually be down weighting further to central London where I only have four assets."

The fund will also be selling some of its south east and rest of the UK offices as it rebalances.

But the fund is overweight to the rest of the UK industrial. "This is going to be pretty resilient on a relative basis so we are happy with that position and not looking to sell much of our industrial exposure," says Ms Rowley. "I don't want to sell my trophy assets and leave the fund in a position I don't want to be in. There is lots of demand for industrial but I want the relative right weighting to industrial."

She is selling the assets that she thinks will get the fund into the right sector position.

The fund had 177 assets at the end of June, including 96 with a value of up to £5m. "The reason we have them is for market liquidity," explains Ms Rowley. "In the last downturn the types of assets sold were mostly in the £0-£5m and the £15-£25m ranges, and that is where I am getting traction on our portfolio now."

The value of the property assets in the fund were reduced by 1 per cent on 30 June and there have been further reductions to asset values in July. Following the fund's suspension from trading it is now valued on a weekly basis by independent valuer Knight Frank.

Despite the problems, Jason Hollands, managing director at Tilney Bestinvest, says that "M&G Property Portfolio is a fund we like in normal market conditions and is held in some of our client portfolios. It has a core plus approach - is mainly invested in prime properties but with some secondary assets that have the potential to be enhanced through refurbishment or change of use.

M&G also carefully manages the fund's exposure to specific tenants and their lease expiry profile. The average unexpired lease is longer than many rival funds at nine years and the void rate is also very low (6.5 per cent at the end of June), both of which are positive factors. The portfolio is also regionally diversified."

However, Brian Dennehy, managing director at fund research site FundExpert.co.uk, prefers Kames Property Income (GB00BK6MJF73) and would suggest Threadneedle UK Property Trust (GB00BQ1YHW31) if it was still open to investment. He says these funds have "a clear emphasis on properties outside London - in particular quality properties with unjustifiably high yields," and held more in cash in the run up to the suspensions than M&G Property Portfolio.

Performance

Source: Morningstar at at 30 June 2016

*Performance is that of an older share class rather than the one indicated in the text

Fund facts as at 30 June 2016

Source: M&G, *Morningstar

Geographical break down net of cash as at 30 June 2016

Largest holdings as at 30 June 2016

Largest tenants by rent payable