The UK commercial property market undoubtedly faces a period of considerable uncertainty following the UK’s vote to leave the European Union. Anecdotal evidence suggests transactions were put on hold during the referendum campaign. This climate and warnings about the potential shock to the UK economy has prompted a number of open-ended funds to suspend dealing to avoid a self-destructive fire-sale of assets at distressed prices from panicking investors.
While these suspensions have been implemented for entirely sound reasons, the widespread attention given to these moves in the mainstream media which is understandably absorbed with the fallout from the referendum, could likely spur a further wave of selling by retail investors, forcing other funds to implement similar restrictions.
The eerie parallels being drawn by some commenters with similar moves by property and money market funds during the credit crisis by some should not be over-stated however because although the near term outlook is uncertain and sentiment around the sector understandably gloomy, unlike 2008 the availability of credit cannot be in doubt.
Worrying though the current turbulent climate is, this is not a moment akin to the collapse of Lehman Brothers when the whole global financial system teetered on the edge of oblivion. The Bank of England has clearly signaled its willingness to provide vast amounts of liquidity to the financial system, UK banks are being allowed to lower their reserves to free up £150 billion of additional lending capacity and an interest rate cut looks imminent – so credit conditions and monetary policy remain unquestionably accommodative.
Action on the fiscal front could be forthcoming too. Once a new Prime Minister is in place, we will also likely see an Autumn Budget focused on actions to promote growth, including a potential cut in corporation tax that might go a long way to shoring up business confidence and sending a message to the word that the UK is open for business.
The data over the coming quarter will give greater line of sight over the Brexit vote’s impact on UK GDP growth and whether a recession will be avoided, as well as actual data on property transactions and that should aid a more orderly price discovery process.
For now, with a number of open-ended funds closed to investors and with the potential for further suspensions should other open-ended funds experience material outflows and see their liquidity buffers deplete, it makes sense to avoid making new investments into open-ended funds until the dust settles.
In the meantime for those wishing to continue to allocate into property, the better opportunities are likely to be found amongst real estate investment trusts and other closed-end investment companies which have sold-off very aggressively.
Listed property vehicles are now trading at discounts in excess of 20 per cent compared to published net asset values, and while there is some doubt over where asset values will settle, these do seem to be pricing in a recessionary scenario, that may yet be avoided. In a scenario where growth slows but the economy avoids an outright contraction, the current turmoil might yet turn out to be a buying opportunity for investors willing to swim against the tide.
Well-managed real-estate securities funds such as F&C Global Real Estate Securities are going to be in a strong position to take these calls on the UK market, while weighing up the relative valuations and risks. For those look to more directly target exposure to physical UK commercial property market, high quality trusts with modest levels of gearing, and reasonably strong unexpired lease profiles are F&C UK Commercial Property and UK Commercial Property trusts both of which trade on discounts of over 20 per cent compared to their published net asset values. Fortune favours the bold.
Jason Hollands is managing director of Tilney Bestinvest.