Following the Brexit vote, seven asset managers, so far, have suspended redemptions on their UK real estate funds. Accounting for around £18 billion—more than half of the open-ended British property funds market—these funds apparently have limited cash/liquid options to meet the flood of withdrawal requests from investors.
Heightened uncertainty around U.K.’s business prospects, following the referendum, has jittery fund-holders rushing to offload exposures to U.K.’s commercial property. But, given the relatively illiquid nature of the funds’ underlying assets, such as office buildings/parks, warehouses and other commercial properties, asset managers are suspending redemptions to avoid a real estate fire sale.
Standard Life was the first to halt redemptions. Its 13% cash reserves proved insufficient to cushion the overwhelming withdrawal requests, compelling the fund to suspend trading on its £2.9 billion U.K. Real Estate fund on July 4—barely 11 days since the poll results came out. The next day, Aviva Investors froze its £1.8 billion Property Trust.
Citing mounting liquidity pressures, Henderson halted trading on its £3.9 billion U.K. Property PAIF fund along with feeder funds. Columbia Threadneedle and Canada Life temporarily suspended redemptions on £1.39 billion PAIF/feeder funds and four funds totaling £450 million respectively.
Additionally, many money managers ‘devalued’ their funds to discourage investors from selling at prices deemed too low. Aberdeen Fund Managers Ltd. slashed a property fund value by -17% and stopped redemptions. Henderson cut its fund price by -4%.
Many asset managers want to avert a 2007-like real estate bust, when funds contributed to a more than -40% decline in UK property prices from their peak. Temporarily freezing trade on real estate funds is probably viewed by their managers as the only way to stem a potential self-reinforcing cycle of redemptions and free-fall in British property prices. It doesn’t help that foreign investment in UK commercial real estate was already down -50% in the first quarter this year. Plus, demand for the nation’s residential properties plunged to a three-year low in May, mainly due to the anticipation over the forthcoming Brexit referendum at the time.
Also, talks of possible U.K. regulatory measures, such as requiring investors to provide a notice period of at least 30 days to six months to liquidate fund positions, and/or allowing sell-offs only at ultra-low prices, are doing the rounds.
Bottom Line for Investors
The Brexit referendum has sparked a drastic change in sentiment, from the post-financial crisis period of skyrocketing London property prices. The fund redemption requests are a sign of increasing apprehensions about the U.K.’s consistency as a business center after its vote to leave the EU—meaning, British commercial properties could experience some price decline in the future, even if temporary withholding of funds’ redemptions prevents it from ballooning into a catastrophic downward spiral. Nevertheless, if prices do manage to fall enough, long-term investors could spot some bargain hunting opportunities for high-end properties in London, especially with an already cheap pound.
On the other hand, the rush to unload British real estate exposure could also shift investor capital towards real estate in the U.S. in the coming months, especially as the latter’s economy is showing signs of resilience.
Disclosure