A large number of open-ended property funds in the UK became the latest victims this week of the fallout following the Brexit vote in the referendum on 23 June.
On Thursday Aberdeen Asset Management and Legal & General Investment Management (LGIM) slashed the value of their UK commercial real estate funds in a bid to contain a rush by retail investors to redeem their cash. Earlier in the week other major UK property fund managers including Standard Life, Aviva Investors, Henderson Global Investors, Columbia Threadneedle and Canada Life halted trading in the face of a spike in redemption requests from unit holders. Aberdeen has also locked up its fund to Monday, 11 July.
The UK's open-ended fund crisis received a lot of coverage in the mainstream press, sparking concerns that the property industry could once again be at the heart of the next downturn in the UK economy. But, as former PwC consultant John Forbes noted, the high volumes of redemptions were largely confined to funds open to retail investors. Many real estate funds for institutional investors made significant changes to governance and liquidity following the 2008 crisis 'to deal with exactly the sort of situation we have now', he pointed out.
Funds open to retail investors are forced by regulation to provide liquidity to investors despite the efforts of the Association of Real Estate Funds (AREF) to lobby the Financial Conduct Authority (FCA) for change on this in 2012, Forbes said. The UK property funds that went into lockdown mode or introduced penalties for redemptions this week were taking 'an entirely sensible step to manage an orderly retreat, precisely to avoid the sort of rout that occurred in 2008,' he noted.
That said, the jitters about the potential fallout from Brexit also reverberated again through the UK's listed property sector with specialists focused on central London again taking the hardest hits. Industry experts agree that the UK office sector will be in the eye of the storm in the short to medium term. Even if the threat of a mass exodus from the City is never realised, the uncertainty will continue to weigh on sentiment.
Brexit cannot take all the blame
But while Brexit is being blamed for virtually everything that is going wrong at the moment in the UK, the current volatility was already visible before the referendum result, Charles Ostroumoff, director of Arca Property Risk Management, told PropertyEU's Outlook Investment Briefing in New York days after the referendum result. Moreover, the Leave vote was preceded by several months of declining transaction volumes, not just in the UK but in Europe too, experts agreed during the briefing.
'Global deals have slowed: deal flows in the first quarter of the year were down 33% in the UK and 25% in Asia and the US,' Ostroumoff pointed out. 'How much of that was due to Brexit? From a global point of view I would say it was marginal.'
Robert White, founder and president, Real Capital Analytics, agreed: 'It is important to realise there was already nervousness among real estate investors well before Brexit became a big concern,’ he said. ‘There was a perception that London was overpriced, like New York, so a correction was on the cards.'
As the uncertainty continues, the weakening of sterling will make UK assets cheaper and therefore more attractive to opportunistic investors. But core investors may be scared off, White said. 'A lot of the foreign investment has come to London because of sterling, but if it is no longer regarded as a strong and stable currency then that whole situation may change.'
At the same time, a large and growing number of investors need to invest their money and compared to other asset classes real estate remains an attractive investment for those with a long-term vision, said Adam Handwerker, managing director, Hodes Weill & Associates. That could be a spur to action, he said. Nevertheless, seen through a non-European investor's eyes, the Continent could look like a riskier proposition, he added. 'More Asian money will go to the US and elsewhere and less will go to Europe,' he predicted.
Uncharted territory
There will be an extended period of caution as it remains unclear what the impact will be over the longer term, agreed Jonathan Hull, managing director of CBRE's EMEA capital markets team. 'Investors will be reviewing their strategies but some are likely to take advantage of currency effects and some are likely to take advantage of positive currency movements. This will affect the wider European business community, not just the UK. Investors will be looking at what the growth prospects are for each individual market.'
'I think the summer may be a time for reflection as many investors consider their strategies for the months ahead,' Hull added.
A key source of the current market jitters, both in the UK and elsewhere, is the uncertainty and unclear time frame surrounding the UK/EU negotiations. Negotiations to unravel over 40 years of legislation and trade deals are not expected to begin until the UK Government has invoked Article 50 of the EU Treaties, which is unlikely to happen until very late this year or early in 2017 as a new British prime minister has to be elected first.
Article 50 sets a two-year target for completion, but that deadline can be extended by mutual agreement. 'The interdependence is such and the complexity and number of issues is such that is likely to take longer than two years,' said Alexander Fischbaum, managing director of AF Advisory. 'It is uncharted territory, so the period of uncertainty will continue for quite some time.'
As the fallout continues, Brexit will no doubt create winners and losers. Another thing that is becoming clearer is that there will be no quick fixes.
Judi Seebus
Editor-in-Chief
