Britain’s impending withdrawal from the European Union could trigger a fall in commercial property prices if investment capital starts to flow out of the market, analysts have warned.
Robert Duncan, analyst at Numis Securities, told the Financial Times that forced sales of buildings by investors could bring the recovery in the UK market to a shuddering halt. ‘You can very quickly get a downdraught moving through the market,’ he said.
This week several property funds took action to stave off the threat to liquidity posed by the fall-out from Brexit, including a 14% fall in the value of the pound against the dollar in the last two weeks.
On Monday Standard Life closed its £2.9 bn open-ended real estate fund to redemptions. The following day Aviva Investors suspended its £1.8 bn UK property fund, citing ‘extraordinary market circumstances’ that ‘have resulted in a lack of immediate liquidity in the Aviva Investors UK Property Trust’. M&G also halted redemptions on its £4.4 bn Property Portfolio, the largest such fund in the UK.
On Wednesday, Henderson, Colombia Threadneedle and Canada Life joined the ranks of UK fund managers that have gone into lockdown mode. Aberdeen Asset Management also suspended trading in its £3.2 bn pound Aberdeen UK Property Fund and the Aberdeen UK Property Feeder Unit Trust to Monday July 11.
Aberdeen also cut the value of the fund by 17%. Martin Gilbert, CEO of Aberdeen AM, said: 'Reducing the share price of the fund reflects the changing market conditions over the past week or so and uncertainty around prices in the property market; sellers requiring liquidity are having to market properties at sometimes significant discounts to their recent valuations.'
Legal & General Investment Management has not gated its L&G UK Property Fund but has introduced a 15% 'fair value adjustment' to the fund that was valued at £2.3 bn at end-June this year.
Fears have begun to crystallise
Earlier this week Mark Carney, governor of the Bank of England, said his fears about the consequences of Brexit had ‘begun to crystallise’. He said stress in the commercial property sector was one of the biggest risks to the UK economy as he presented the bank’s latest half-yearly financial stability report.
Commentators have warned that the structure of open-ended property funds leave them vulnerable to shock events such as Brexit. ‘The fundamental mismatch between a highly illiquid asset class and a promise of instant access to your money means open-ended property funds have always been accidents waiting to happen,’ argued Patrick Jenkins in the FT.
Jenkins pointed out that the latest filings from Standard Life, M&G and Aviva showed all three funds had smaller cash reserves than their rivals at 13%, 7% and 9% respectively, compared to a typical level of around 25%.
Share prices in listed commercial property companies took a downturn again on Wednesday, after seeming to recover earlier in the week. Land Securities was down by 2.8% by mid-afternoon, while Great Portland Estates fell by 4.5% and Derwent London was down 3.3%. British Land lost 2.1%. All four had posted gains above 6% in Tuesday’s trading.
