Shades of 2008 as Brexit Gives Property Funds the Collywobbles
Commercial property funds are in post-Brexit turmoil as thousands of savers and investors have been denied access to their money, portfolio valuations are slashed and fund managers seek to avoid meltdown in moves reminiscent of the aftermath of the banking crisis in 2008.
A double dampener of the summer doldrums and the huge uncertainty that exists since the UK decided to exit the EU has left previous property valuations looking extremely optimistic and fears of an overall slump in property prices.
A spokesman for Aberdeen Asset Management said this week: ‘We believe that properties coming to market now are unlikely to achieve recent valuations’ and as a result fund managers have written down portfolio values by hundreds of millions of pounds.
Faced with a sharp decline in the value of their ISA or pension funds, investors have been rushing to the exit only to be told that they are not able to cash in their holdings.
To date Aberdeen Asset Management, Threadneedle, Legal & General, Standard Life Investments, M&G, Aviva and Henderson have all either cut values, closed their funds to withdrawals or both.
Portfolios have been down valued by up to 5% which represents huge amounts of money in the context of funds that comprise billions of pounds of investment; Henderson’s UK Property fund has nipped 4%, or £160m, from the valuation of its £4bn pot and Standard Life’s UK Real Estate fund has been written down by 5% – a cool £145m.
So far M&G, Aviva, Standard Life, Threadneedle and Canada Life have all suspended redemptions leading to an increasing number of complaints to the ombudsman.
This is a problem that only afflicts open ended funds – predominantly unit trusts and OEICs – which create and cancel units in the fund according to demand.
‘fund managers have written down portfolio values by hundreds of millions of pounds’
Because of the fundamentally illiquid nature of commercial property, such funds have a ‘liquidity pot’ of cash or shares with which to pay those that wish to redeem their units; when this runs out, the only way to give investors their cash is to sell properties.
Until that can be done, property funds exercise a right written into their terms to halt trading, or ‘gate’ funds which means that investors can no longer take their cash out – which can further panic an already spooked market and cause property prices to spiral downwards.
Unaffected are REITs, Real Estate Investment Trusts, which are ‘closed-ended’ in that they are investment companies with a limited number of shares in circulation; where there is a buyer and a seller, the market will find its level without underlying buildings needing to be sold.
Not all funds that invest in commercial property will be hit – the current crisis is based upon the fear that office space in London’s financial district would be over priced if the City were in any way diminished post-Brexit, exacerbated by the threat by some firms to relocate elsewhere in the EU.
Property funds have been popular with DIY investors as ISA or SIPP investments, they are also bought by wealth managers on behalf of their clients and they are also a component of a large number of other funds that will be held by pension and with-profits funds the length and breadth of the country, so the knock on effect of the current crisis could be widespread.
However, a balanced pension portfolio should include no more than ten percent investment in commercial property.
Property funds deliver two potential returns – capital, where the value of the properties held appreciates, or now falls, and income which is derived from rent paid on the properties.
Those not needing to flee and incur a large capital loss may decide to ride out the storm by continuing to reap the rental income whilst hoping that capital values recover; many investors that choose property funds do so to achieve income and should remain largely unaffected.
A glut of properties coming up on the market could see prices collapse and the problem could intensity further, locking investors into their holdings for longer; a more palatable outcome would see market sentiment improving, fewer withdrawals and a restoration of calm, which may just provide a blueprint for the UK following June 23rd.