In a bid to “protect the interests of investors”, Columbia Threadneedle Investments has suspended dealing in the £453m CT UK Property Authorised Investment fund and its feeder fund.

It said: “This is due to the amount of cash in the fund reducing to a level where future redemption requests would not be able to be met until an orderly sale of assets has completed.”

It added: “Up until now, any requests from investors to sell their shares have been met while maintaining the fund’s robust composition. However, a recent increase in redemption requests has led to the cash balance in the fund reducing to a level where it would not be able to meet future redemption requests until a further orderly sale of assets has been completed.”

The funds invest in physical UK commercial property and is overweight in the industrial sector with minimal exposure to high street retail.

Columbia Threadneedle confirmed the funds will continue to be priced daily and income will continue to be paid while dealing in the fund is suspended. Its other retail property funds remain open and are unaffected by this suspension announcement.

Flight to liquidate illiquid assets

It comes after three major asset managers – Columbia Threadneedle, Schroders and Blackrock – reportedly moved to restrict withdrawals from property funds following the fallout from the government’s mini Budget.

Following Chancellor Kwasi Kwarteng’s unfunded tax cuts, a host of pension schemes which are significant investors in property funds, looked to sell holdings in order to deal with demands for collateral.

For Ryan Hughes, head of investment partnerships at AJ Bell, this is a stark reminder that open-ended property remains “totally unsuitable” for daily traded investments.

“It’s remarkable that this still needs to be said given this is the third time in the past six years that this situation has occurred,” he said.

Hughes added: “The liquidity mismatch is clear for all to see, and the highly volatile conditions currently being witnessed in markets exacerbates that risk when investors take flight and look to liquidate assets quickly. Property managers are then forced to sell into an unstable market, where buyers will be highly selective in the assets they want to purchase, creating a situation which puts the buyer in poll position to dictate the price.

“The challenges in the sector are also evident in the listed property space where REITs currently trade at significant discounts, which is essentially the trade-off for offering liquidity. With the economic outlook challenged, it remains to be seen whether this discount is an opportunity, or whether NAVs will ultimately fall towards the discount.”

‘Dangerously’ low cash assets

Oli Creasy, property research analyst at Quilter Cheviot, said this is “round two of UK property fund trading suspensions”.

Creasy said: “The first round was specific to the funds that had significant pension exposure, and was more of an isolated issue. However, what we are seeing today looks more like a general UK property market issue.

“Whether this precipitates other UK property fund suspensions across the industry is yet to be seen. But it is worth bearing in mind that this fund is relatively small. For context, the biggest property fund in the market, L&G, is about £2bn in size, so the CT fund is relatively small in comparison. It also had only 2.8% of its assets in cash which is a dangerously small number, and heightens the risk of suspension. The industry standard is about 15-20% in cash which means that a fund can handle most requests for funds back.”

Will cash be returned to investors?

Creasy said one of the questions that the fund manager will have to answer is ‘will it open up again?’

“If investors do not withdraw redemption requests, and the value of the properties held in the fund falls due to interest rate rises, the fund could be substantially smaller than the current level by the time of re-opening.

“A fund below that level begs the question whether it would be better to explore winding it up and returning cash to shareholders, as some will argue the fund is simply too small to justify its existence. Investors should prepare themselves for the possibility that all assets are returned as cash rather than the fund reopening – something that has happened in the recent past with Janus Henderson and Aegon property funds.”

Will other funds follow suit?

Creasy added: “The question on investor’s lips will be whether other funds are also facing the risk of suspension? The answer is maybe; there have been instances in the past when contagion has gripped this market, however, it isn’t always the case.

“Some of the other funds in the market are better-capitalised (for example, L&G had >15% in cash as of 31/08/22) and therefore may be better positioned to cope with further redemptions.”

Ongoing property fund notice period consultation

In August 2020, the regulator, the Financial Conduct Authority (FCA) consulted on whether property funds should be required to have notice periods before an investment can be redeemed. It suggested a notice period of between 90 and 180 days for these funds, and also asked for any alternative proposals. However, it is yet to settle on a final set of rules.

Hughes said: “Over two years later, we appear to be no further forward, with existing investors still left in limbo and the sector essentially uninvestable given the material uncertainty surrounding the redemption terms.”