Retail property funds in the UK should expect further markdowns this summer before starting to bounce back, Andy Moylan, head of real estate products at Preqin, told PropertyEU in an interview.
‘It’s the old herd mentality,’ Moylan said. ‘If some fund managers mark down their funds or suspend redemptions, others follow suit. I think the value of retail property funds in the UK could be marked down by around 10% or so before re-opening and stabilising in a couple of months.’
Seven UK property funds including an Aberdeen Asset Management fund, which together manage around £18 bn (€21.5 bn) of assets, froze redemptions earlier this month to prevent a run on funds. The freeze came on the back of warnings as analysts expressed fears that London office values could plummet by as much as 20% within three years of the UK leaving the EU. However, Aberdeen reopened its £3.2 bn UK property fund and feeder trust on 13 July, saying that most sell orders had been reversed.
Such a move was inevitable, according to James Beckham, head of London Capital Markets at C&W. ‘I’m not surprised that so many funds suspended redemptions or initially sought to lower the value of their funds. They were facing outflows of such magnitude that they had to defend themselves. The retail fund managers rightly have to protect the interests of their investors who want to remain invested in the funds and benefit from the stable income returns they continue to provide.’
Aviva Investors also suspended its £1.8 bn UK property fund earlier this month, followed shortly afterwards by an announcement from M&G Investments that it was suspending withdrawals from its £4.7 bn Property Portfolio. Standard Life was the first to act, closing its £2.9 bn open-ended real estate fund to redemptions.
In addition, Aberdeen Asset Management slashed the value of its UK fund by 17% in early July, effectively imposing a levy on investors who decide to cash in their fund units. It has since put two assets in London up for sale, including 10 Hammersmith Grove for £105 mln. ‘It is already under offer to a private equity buyer and received multiple bids,’ one analyst, who asked not to be identified, told PropertyEU.
Discount for London offices
Interested parties are believed to include AXA, Hines, TH Real Estate and Hermes Investment Management. Due to the tight timetable for the disposal, the sale is expected to be priced at a discount and generate an initial yield of towards 6%. ‘Strong interest at a time like this shows that UK property fundamentals are good although the pricing discount is a result of a motivated seller and a nimble buyer,’ he added.
However, it is ‘anyone’s guess’ where the market will end up, according to John Cartwright, CEO of the Association of Real Estate Funds (AREF) in London. The Financial Conduct Authority (FCA) announced in early July that it will continue to liaise with property funds as they keep the situation under review. AREF also intends to meet its nine members who manage retail funds ‘very quickly’, Cartwright said, before discussing the matter with the FCA. How such funds are regulated will also be discussed, Cartwright said.
‘The Brexit is a one-off unique event that has triggered a sentiment shift,’ said Cartwright. ‘We need to see how that plays out. I’m not saying that German-style regulation (where unit holders have to wait 12 months before they can make any redemptions) would make sense for us but, at the same time, not all retail investors need daily liquidity. One option could be different redemption periods, depending on the need of investors.’
Global investors down on the UK
In the wake of the Brexit vote, 57% of global institutional investors with exposure to real estate said that they expect to invest less in the UK over the next 12 months as a result of the referendum result, according to a survey of 90 investors carried out in the wake of the Brexit vote by Preqin. That figures gains an extra significance when taking into account that the UK is the second largest investment management centre in the world after the US and manages 37% of all assets managed in Europe, according to the Investment Association.
However, it is not all doom and gloom. According to Preqin’s recent survey, 32% of respondents stated that they expected to invest less in the UK over the longer term as a result of the Brexit, but the majority (55%) does not expect it to affect their approach to the UK market and 13% even anticipate allocating more capital to the UK.
