Lockdown of property funds in UK is tricky for local investors
INVESTORS wanting to cash out of property investments in the UK are being blocked. Although the funds affected are not directly linked to local listed property funds, the rising number of distressed property sales in the UK could reset property prices on the low side for JSE-listed property assets.
Seven commercial property funds controlled by UK life insurance and investment companies, holding billions of pounds of listed and direct property assets, have been unable to meet investor withdrawal requests and have suspended exits as they lack the liquidity required.
Outflows began in April, with the most prescient investors determined to cash out before Brexit uncertainty sullied property asset prices, but have accelerated rapidly since the Brexit vote.
ClucasGray fund manager Brendon Hubbard said the UK open-ended funds set their trading prices at the last-stated net asset value, so it is understandable that investors want out before the NAV is restated.
He said the problem was a mismatch between the daily trading capability of such funds and the underlying assets, which could take six months to sell. “These are by definition daily investable structures which go and buy physical properties. That works until you have a wobble and have to provide daily liquidity.”
According to Hubbard, most of these UK funds are trading at discounts of 20% or more.
“British Land & Property Fund, one of the largest of its type, is trading at a discount of nearly 39% to the last stated NAV number. Any rational person would want to get out.”
These funds held 2% of UK commercial property at the time of the 2008 financial crisis, but now hold about 5%. Distressed sales to raise liquidity could have a severe knock-on effect on the values of properties held by JSE-listed property companies.
“It sets a reference point for everything,” said Hubbard.
“The big South Africa-listed funds are already trading at massive discounts — they’ve been reset already.”
Schroder Real Estate Investment Trust is down 17% since June 23, the day of the Brexit poll, with Capital & Counties down 26%, Intu down 16%, Capital & Regional 23% and Redefine International 10%. What should investors do? “It comes down to a macro call on UK politics. If you think Britain will actually leave — and at this stage it’s just a high probability, but not a certainty — there’s no doubt the office market in London will come under significant pressure, as will the housing market,” said Hubbard.
Multinationals would be considering options for new EU business bases should the UK leave, with Dublin the most likely destination given the similarity to London in labour law, tax regime and language. The US financial institutions, he said, would probably set the lead, with Japanese and other firms to follow.
“However, if the UK ultimately does not go, a lot of property investments right now start looking very attractive. British Land & Property Fund has moved from a yield of 3% to 5%. Unfortunately, there is no quick way to see which way this will go — the first property transactions will only start going through in a few months.”
Keillen Ndlovu, head of listed property funds at Stanlib, said in general property fund transactions would slow down given the uncertainty around Brexit.
“Tenants are unwilling to commit to long leases and the rental market is dampened. That will affect property valuations. The outlook for capital growth doesn’t look good.”
However, if the UK property funds are forced to sell properties, Ndlovu said, they were likely to start with listed assets and then prime properties they own directly, which would mean other listed property companies might pick up some prime properties at bargain prices.
Most South Africa-listed property companies, he said, have good tenant profiles in well-located properties and have sensibly reduced their debt levels over the past few years. In short, they made use of extraordinary growth in the UK property market to pay down debt and prepare for such turbulent times.
“Investors should take a longterm view. There will be shortterm volatility but, for example, Intu has shopping centres not only in the UK but in Spain, which is seeing strong tourism, and Redefine International has a well-diversified portfolio outside of the UK, which is a plus.”
He said Capital & Counties had been punished in particular because its Covent Garden asset was still in the pipeline — and an unrealised pipeline in an uncertain market was always going to attract more negativity.
Many of the recent listings with investments in foreign property assets on the JSE had been touted as a good rand hedge, but the pound’s value has slid since Brexit. Ndlovu said investors should never invest in foreign property simply as a currency call.
“Our philosophy remains to invest in good, well-run companies with great assets.”
They have no liquidity . . . any rational person would want to get out