Property funds freeze trading: should investors worry?
Standard Life Investments, Aviva Investors and M&G have suspended trading in their commercial property funds after an increase in redemption requests following the Brexit vote. We look at what this means for investors.
Standard Life Investments (SLI) was first to ‘gate’ its Real Estate fund, which means investors are not able to buy or sell units in the fund until further notice. It suspended dealing from midday on Monday after a rapid increase in redemption requests following the Brexit vote.
A firm spokesperson said: “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.
“The suspension will end as soon as practicable, and will be formally reviewed at least every 28 days.”
As the UK’s third largest open-ended property fund for retail investors and with £2.9bn under management, this unsettled investors across the sector.
And rightly so, it seems.
Hot on its heels was the announcement from Aviva Investors saying it too was suspending dealing in its £1.8bn Property Trust fund from Tuesday.
M&G also announced it had temporarily suspended trading in shares of its Property Portfolio and its feeder fund which took effect from 12pm on Monday.
Update 7 July: Since this story was published, Aberdeen Asset Management, Canada Life, Columbia Threadneedle and Henderson have also confirmed they’ve suspended trading in their UK property funds.
So, what’s behind these moves and should investors be worried?
Why is money flowing out of property funds?
The issue with open ended property funds is they are illiquid. In other words, it takes time to sell commercial property such as office blocks and warehouses.
For this reason, fund managers hold large cash buffers to protect investors at times when there are more sellers than buyers.
In the lead up to the EU referendum, and in the aftermath, these cash buffers were eroded by investors heading for the doors, concerned about the short- and medium-term outlook for the UK, and hence the UK property market.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices. The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilises.”
He said there may be challenging times ahead for the sector and there couold be a new wave of investors unable to liquidate their property funds quickly, a scenario last witnessed during the financial crisis of 2007 and 2008.
What should investors do?
Long-term investors are being urged not to panic.
“I would emphasise that long term investors in the asset class, who would otherwise not change their investments, should not be panicked into making a move. Property is still a good diversifier in an overall portfolio and yields on these funds may also increase, which will be a positive for income investors,” said Darius McDermott, managing director of Chelsea Financial Services.
This view is echoed by Patrick Connolly, certified financial planner at Chase de Vere, who said: “Commercial property is an illiquid asset class and so investors need to adopt a long-term approach and not look to make short-term tactical trades.
“Investors should not panic and instead should sit tight, understand that there will be periods of good and poor performance with any long-term asset class and ride out this period of negative sentiment.”
Khalaf said: “Investors in property funds need to focus on the reasons they bought commercial property in the first place, and consider whether they are still intact, because there may be challenging times ahead. Diversification and income are both legitimate reasons for investing in the commercial property funds, but high costs and poor liquidity are two drawbacks which investors need to be willing to shoulder before investing in the sector.’
If investors have money in other property funds and need to access to their investments in the “very near future”, they should do so “sooner rather than later” as other funds may follow suit, according to McDermott.
However, he said there will be very high exit charges for doing so, as most physical property funds have already had ‘fair value adjustments’ and moved from offer to bid pricing.