Trading has been suspended on three major commercial property funds in the United Kingdom (UK). Standard Life Investments made the move yesterday with Aviva Investors and M&G Investments following today, citing “exceptional” or “extraordinary market circumstances” and the need to protect investors. Meanwhile, the Bank of England’s just released Financial Stability Report warns declining commercial property values could also undermine the availability of credit given the widespread use of real estate assets as collateral for access to finance.
Much of this upheaval is attributed to UK voters’ recent majority decision to withdraw from the European Union (EU) although many analysts were already anticipating diminished returns for 2016 with real estate heading into a down cycle. The Financial Stability Report points to pronounced foreign investment in UK property, accounting for about 45 per cent of the total value of transactions over the past seven years, and “stretched” valuations in some segments of the market.
“It is now more likely that adjustments in commercial real estate could tighten credit conditions for UK businesses,” Mark Carney, Governor of the Bank of England, said as he released the report earlier today. “Foreign flows of capital into commercial real estate fell 50 per cent in the first quarter of 2016, transaction volumes have fallen further during the second quarter and share prices of property REITs dropped sharply following the referendum.”
A spate of investors cashing out their property fund holdings triggered Standard Life, M&G and Aviva’s moves to suspend trading. In an associated statement, Standard Life advised “the suspension was requested to protect the interest of all investors in the fund and to avoid compromising investment returns from the range, mix and quality of assets in the portfolio.”
Like a time out in a sporting event, a suspension of trading temporarily halts market action — giving fund managers more room to manoeuvre in paying out departing investors and/or interrupting an exodus that could force the sale of assets and further devalue the fund.
“An illiquid asset class like direct real estate cannot be traded like a stock and turned into money the same day. To get the money for the redemptions, they may be forced to sell assets in the fund, possibly at a loss, in order to pay back the investors,” explains Chris Langstaff, senior vice president, research and strategy with LaSalle Investment Management. “As an investor, two options are to wait in line or just sit tight until things return to normal.”
Other notable UK property funds have downgraded the value of their portfolios since the June 23 Brexit referendum. Combined with many funds’ switch to bid pricing, investors looking to redeem these funds will see returns now estimated to be about 5 per cent lower than they would have been on June 22.