Property fund investors are facing lower valuations and trading suspensions on funds, but fund selectors warn against kneejerk reactions to ditch the asset class.
Since the Brexit vote, asset managers and analysts have warned the move will put downward pressure on UK property valuations, leading a number of fund groups to downgrade prices on their property funds and, more recently, suspend trading in them.
Standard Life Investments stopped trading on its £2.7bn UK Real Estate fund in response to redemption requests yesterday, followed by Aviva Investors making the same the move with its £1.9bn Property Trust.
This move “will give Aviva Investors greater control in managing cashflows and conducting orderly asset sales in order to meet our obligations to investors wishing to redeem their holdings”, a company spokesperson says.
Following SLI and Aviva’s moves, fears are building that more funds will follow suit.
Henderson and Aberdeen Asset Management told Fund Strategy they are not planning to stop trading in their funds, but Henderson says it will “continue to monitor the conditions of the sector”, while Aberdeen says it has “no more plans beyond valuation changes”.
The two fund managers, along with others, have already cut prices on their funds in the week following the Brexit vote.
Tilney Bestinvest managing director Jason Hollands warns that as other big property funds end up reaching between 10 and 15 per cent liquidity in their funds they might halt trading too.
The Standard Life fund had a cash position of just over 13 per cent, while Aviva’s fund had 9.3 per cent in cash at the end of May.
Architas senior investment manager Nathan Sweeney says the decision by SLI and Aviva to suspend trading will cause more anxiety for property investors, but they should not write-off the funds.
“It would be wrong to dismiss mainstream commercial property funds, such as that offered by Standard Life, based on a temporary suspension of trading,” he says.
“Given the risks and the continued fallout from Brexit we believe it is wise to increase our exposure to less correlated specialist property holdings, such as distribution warehouses and healthcare. These areas have different drivers of return so should provide a balance to more mainstream property holdings.”
Sweeney says: “While the return profile of property will likely be lower with rental increases slowing and demand likely to fall in some sectors, investors should be wary of discounting property completely and should carefully consider why they chose to hold it within their portfolios. It is still a lower volatility, potentially attractive income play in a low growth, low yield environment.”
Chelsea Financial managing director Darius McDermott says those investors looking to switch out of certain funds, should be wary of the “very high” exit fees.
He says: “If investors need to access their investments in other property funds in the very near term, they may wish to do so sooner rather than later, as some others may follow suit. However, investors should be aware that 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.”
Hargreaves Lansdown senior analyst Laith Khalaf says investors in property funds need to look back at the reasons they bought commercial property and evaluate whether they are still “intact”, considering the challenges in the sector.
He says: “Diversification and income are both legitimate reasons for investing in 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.”
Henderson’s UK Property Paif, Threadneedle’s UK Property fund and SLI’s UK Property Accumulation Feeder Trust were the top three most sold among 20 property funds from 1 June to 5 July, according to FE. These were sold 1,228, 543 and 458 times respectively during the period.
The SLI UK real estate fund and Aviva’s Property Trust came 14 and 10 in the FE rankings respectively.
But Sweeney says foreign investors will continue to be attracted to the UK property market over the long term despite the current prices crisis.
But as the Bank of England noted in its financial stability report released today, foreign investment in the UK commercial real estate market fell by 50 per cent in the first quarter of this year.
The BoE warned any adjustments in commercial real estate markets could “potentially” be amplified by what investors do in open-ended commercial property funds.
FCA boss Andrew Bailey warned today the structure of open-ended property investment funds may need to be reconsidered, adding that he is in “very close touch” with firms in the sector for a review.