The freezing of Aviva Investors Property Trust and SLI UK Real Estate Fund comes a week after several funds cut the valuations of their assets by 5% and follows several months of net outflows in the sector.
Aviva Investors said it had “been experiencing higher-than-usual volumes of requests to sell units” in the £1.8bn (€2.1bn) fund, and that “challenging market conditions in light of investor sentiment regarding the EU referendum” meant the fund’s cash reserves had become depleted.
A statement said: “Temporarily suspending dealing in the trust enables us to manage this situation in a fairer and more controlled way.
“By taking a little longer we hope to sell properties at more competitive prices so that we can act in the best interests of all investors.”
“This could stem fire-sales, limiting the discounts at which funds would have to sell their holdings”
Today, the Bank of England revealed today it was monitoring closely the UK real estate market and the potential “amplification” effect of open-ended property funds.
“Although they have a range of measures to manage stressed levels of redemptions, these open-ended funds could be forced to sell illiquid assets to meet redemptions if conditions persist beyond funds’ notice periods,” the Bank’s biannual financial stability report said.
“Any such amplification of market adjustments could affect economic activity by reducing the ability of companies that use commercial real estate as collateral to access finance.”
The freezing of the two funds is likely to raise fears of a repeat of 2008 – when several funds suspended trading and real estate capital values eventually dropped 44% – but Capital Economics said the news could “have a silver lining”.
Eduardo Gorab, property economist at the consultancy, said it was “worrying illustration of how negative property market sentiment has become”, but “by limiting redemptions, funds would allow the uncertainty surrounding the UK’s political and economic environment to recede”.
In a note, Gorab said: “In turn, this could stem fire-sales, limiting the discounts at which funds would have to sell their holdings.”
Capital Economics expects monetary policy to help support valuations and is relatively sanguine about the prospects for the UK’s occupier markets.
“Clearly, the uncertainty kicked up by the referendum’s result has had an adverse impact on sentiment, which has been driving outflows over the last week or two,” Gorab said.
“However, if we are right in thinking that occupier and investment markets are well placed to weather the uncertainty, we suspect that fears of a repeat of 2009 are overdone.”