Open-ended UK property funds have suspended trading and more could follow ahead of an end-of-March deadline for underlying asset valuations.
Columbia Threadneedle, Legal & General Investment Management, Aberdeen Standard Investments, Aviva Investors, BMO, Kames Capital and Janus Henderson have ‘gated’ their funds due to uncertainty around real estate valuations. The M&G Property Portfolio was already suspended in December.
The moves are consistent with new rules that come into force in September that will force fund managers to suspend trading if there is “material uncertainty” about the valuation of at least 20% of fund portfolios.
John Forbes, an independent consultant and expert on UK real estate funds, said the move “seems entirely sensible” given the uncertainty in the market.
But he warned that others could follow ahead of the end-of-March deadline for both monthly valued funds, which are predominantly used by retail investors, and quarterly valued vehicles, which are the preserve of institutional investors.
“Although this is currently limited to the daily traded funds, we are approaching the quarter-end, so funds with quarterly valuations will need to take decisions shortly too,” he said.
“Difficult to see anyone being able to argue that there is not material uncertainty.”
In a statement, the Association of Real Estate Funds (AREF) said: “The UK commercial property market is facing unprecedented circumstances as a result of the COVID-19 outbreak and so valuation firms can no longer make reliable judgements on value… Fund managers are acting promptly to protect investors and there have been a number of such suspensions with more likely to occur.”
Paul Richards, managing director of AREF, said: “Investing in UK property is an investment in hotels, offices, shops, warehouses, and restaurants up and down the country.
“COVID-19 is causing great economic uncertainty, hitting all of these businesses, and also reducing the number of investment transactions which provide evidence for property valuations. This means that valuers can no longer assess the value of properties with a high degree of certainty.
“Under these conditions, property funds need to suspend while this extraordinary situation lasts, in order to ensure that investors, mostly long-term pension savers, are protected. Strict FCA regulations apply, in order to ensure that all investors are treated fairly.”
Paul Jayasingha, senior director of investments at Willis Towers Watson, who advises institutional investors, said the “denominator effect” of falling stock markets could encourage investors to sell open-ended holdings. “It is possible that investors will be overweight unlisted real assets,” he said.
He said it was “unclear how end-of-March valuations will be determined in open-ended funds”, adding that “we understand there could be ‘qualifications’ applied to the end-of-March valuations reflecting the uncertainty from the independent valuers”.
Jayasingha said: “The follow-on issue is whether managers will allow subscriptions or redemptions at this qualified unit price or whether they will adjust the buy/sell price to reflect this uncertainty and if so how much.
“For UK institutional open-end real estate funds, post the global financial crisis, the redemption provisions have moved to become far more in favour of the long-term investor rather than the panicked seller.”
Forbes said the challenge regarding valuations was likely to arise in other asset classes. “[It] potentially affects a lot of funds that are not real estate funds,” he said. “How do you value a corporate bond at the moment?”