Commercial property funds hit in Brexit fallout
M&G Investments is the third firm to suspend trading in its commercial property fund - the biggest of its type in the UK at £4.4 billion.
The move follows similar action by Aviva Investors on its £1.8 billion property fund and Standard Life Investments on its £2.9 billion UK real estate fund.
The moves have followed a surge of redemption requests. Investors will not be able to have their money returned to them until trading resumes.
Aviva, like Standard Life, cited 'extraordinary market circumstances' which have hit the fund's liquidity.
In a statement Standard Life said the suspension will end 'as soon as practical', and will be formally reviewed at least every 28 days. The group said: 'The decision was taken following an increase in redemption requests as a result of uncertainty for the UK commercial real estate market following the EU referendum result.
“The suspension was requested to protect the interests of all investors in the fund and to avoid compromising investment returns from the range, mix and quality of assets within the portfolio.”
Why have the funds been suspended?
At times when investors rush to the exits all at once, it is difficult for open-ended commercial property funds to meet withdrawals.
This is because commercial property funds own property directly, and sales are not quickly or easily arranged - particularly in times of market uncertainty. It is therefore hard to raise money quickly.
Some funds had to suspend trading when they found themselves in this situation during the financial crisis.
Investors holding investment trusts that invest in commercial property, on the other hand, can simply sell their shares on the stock market in order to fund redemption requests. The shares may fall in value, but the properties in the trust do not need to be sold.
Most open-ended commercial property portfolios now include buffers of cash to meet withdrawals, typically between 10 and 20%.
But at times of market stress and uncertainty, demand from the number of investors looking to sell can be much higher than the cash buffer, which then results in trading being suspended.
Patrick Connolly, a certified financial planner at Chase de Vere, expects other commercial property funds to follow suit due to the Brexit vote, which some experts fear will have a negative impact on both commercial and residential property prices, particularly in London.
More write-downs expected
Last week two other property funds - Henderson UK Property fund and Aberdeen Property trust - wrote down the value of their portfolios in the wake of the Brexit vote.
As a result investors who exit the funds will get less for their holdings than would have previously been the case. Henderson wrote off £160 million, while Aberdeen reduced the value of its portfolio by £128 million.
“The decision of Standard Life to cease trading on its property fund is a real sign of the outflows which funds are experiencing and managers' expectations that more investors will head for the exit door,” said Connolly, speaking before Aviva Investors had made its announcement.
“The speed and scale of this move is a little surprising considering Standard Life, along with other managers, seemed to have sufficient levels of cash and liquid assets to cater for anticipated withdrawals.
“It is likely that other managers will be experiencing similar levels of outflows and so we can expect them to follow suit, even if only as a precautionary measure.”
Commercial property has been in a sweet spot in recent years, with the asset class notching up double-digit returns in 2013, 2014 and 2015, with a rise in economic growth helping drive the boom.
This story was originally written for our sister magazine, Money Observer.
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