Property funds: what the experts say

Gated!

After the initial postBrexit sell-off, financial markets quietened, and the FTSE 100 even chalked up a major rally. “But investor concerns have shown up in another market,” said Buttonwood in The Economist: property. On Monday, Standard Life suspended redemptions in its £2.9bn UK Retail Property Fund after a rush of investors sought to cash out. The following day, M&G’S £4.4bn Property Portfolio (the UK’S largest commercial property fund) and a £1.8bn Aviva fund also “gated” investors. It looked like “the first real sign of post-brexit financial stress”. The market clearly agreed. The news sent share prices tumbling for other fund managers and companies exposed to property, and put renewed pressure on the pound, which fell to a new post-vote low.

Illiquidity issues

“The last time commercial property funds in the UK suspended redemptions was just before the financial crisis,” said John Stepek on Moneyweek.com. Hardly a “reassuring” precedent. The problem with these investment funds is the mismatch between their liquidity (theoretically, investors can redeem their cash at any time), and the illiquidity of their underlying assets. It takes time to flog off an office development or a shopping centre. All three funds had hefty cash cushions with which to finance redemptions (in Standard Life’s case, 13% of the fund’s value). Clearly, these weren’t big enough to withstand the number of investors wanting out. UK commercial property, particularly in overheated London, was already looking “wobbly”. Brexit might have “marked the top”.

Worrying portents

The fear now is that any forced selling by investment trusts will act as a catalyst for a steep drop in commercial property prices, said Robert Duncan of Numis Securities in the FT. “You can very quickly get a downdraught moving through the market.” Other fund managers fear “a vicious circle of value destruction”, and that the anxiety could spread to other asset classes. There’s a “worrying whiff of investor panic”, said Jonathan Guthrie in the FT. These suspensions are a reminder that “commercial property is not the oneway bet” that “bullish hobbyist investors imagined”. But “fingers and toes are now being crossed in the City” that they aren’t the portent of “deeper trouble for the investment industry”.