Reports in the Financial Times suggest that Columbia Threadneedle, Schroders and Blackrock have all moved to restrict withdrawals from property funds.

For example, Schroders confirmed that its UK Real Estate received redemption requests worth £65.3m in the second quarter of this year, which were due to be paid on 3 October. However, only £7.8m of this figure is being paid now, with the outstanding balance being pushed back until July next year.

Elsewhere, Columbia Threadneedle has moved to monthly redemptions, rather than daily, on its Threadneedle Pensions Pooled Property fund, which it put down to “liquidity constraints” as well as an increase in redemption requests.

A spokesperson said: “We believe introducing this procedure is in the best interest of investors in the fund, allowing for an orderly sale of assets to meet redemption requests. We aim to return the fund to daily dealing as soon as possible and will notify policyholders as and when this will be the case.”

‘Liquidity mismatch’

The fallout from the government’s mini Budget saw a host of pension schemes ‒ which are significant investors in property funds ‒ look to sell their holdings in order to meet demands for collateral. 

However, fund managers can experience difficulties in meeting these redemption requests given the illiquid nature of property investment.

Ryan Hughes, head of investment partnerships at AJ Bell, explained: “With interest rates rising, the cost of borrowing is increasing, and this has a clear impact on commercial property just as it does on residential property and there are concerns that values may fall sharply.

“As a result, current institutional investors in commercial property funds are looking to reduce their exposure and are looking to sell their property holdings. The problem comes when the pace of redemptions threatens to outweigh the available liquidity in the property funds. These funds will hold some cash to meet the day to day needs of the fund but when redemptions pick up this cash gets used to give investors their money back.

“The issue then arises that the fund managers can’t sell the underlying properties fast enough to replenish this cash. In essence we have a liquidity mismatch where the liquidity of the underlying asset is different to the terms offered to investors. The only option open to the fund managers is then to either lengthen the time that they can pay investors back or suspend the fund.”

‘Property funds are totally ill-suited to daily dealing’

Asset managers have previously had to impose withdrawal limits on property funds, for example following the Brexit vote and at the start of the pandemic.

Hughes said the latest withdrawal limits is down to the same issue as when sentiment turns against property funds, investors look to sell out faster than the fund managers can raise liquidity.

“This is why open-ended property funds are totally ill-suited to daily dealing but there is a risk this liquidity mismatch will occur. We have been here before during the financial crisis, Brexit and Covid and it seems we may be back here again,” he said.

However, today’s reports relate to institutional property funds, not retail ones so “there is no need to panic if you are a holder of one of the few remaining retail property funds”, Hughes said.

Death knell for the sector?

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 “which has left the retail sector in particular in limbo”, Hughes said.

He added: “The FCA has suggested that illiquid assets such as property should have long notice periods to reduce the risk of the liquidity mismatch but these rules have not been finalised, quite possibly because it would likely prove a death knell for the open-ended retail property sector. Some providers, notably Janus Henderson and Aegon have given up waiting and simply wound up their funds, giving investors their money back. In the retail space, this leaves only a few providers still soldiering on waiting for the outcome of the FCA’s review.”

Hughes urged investors to review their positions and think about whether the asset class and fund structure remains appropriate for them.

“With the potential for retail investors to have to give six months’ notice to sell should the proposed FCA rules come into force, I suspect many will look to move out of these funds rather than risk having to wait such a long time to get their sale proceeds,” he said.