Suspended UK property funds need to ‘put themselves in a strong enough position to handle redemptions when they reopen’, Simon Molica, portfolio manager at Morningstar Investment Management in the UK, has told PropertyEU this week.
It has been a bad summer for UK property funds, following Britain’s shock decision in June to exit the EU. In June alone, investors pulled £1.4 bn out of UK commercial property funds, according to the Investment Association, thereby far outstripping the £561 mln that retail investor withdrew from UK investment funds at the height of the last financial crisis in January 2008. In July this year - the last month for which figures are available - investors also withdrew more than £470 mln from UK property funds, according to Morningstar, which estimates that the true figure ‘could be significantly higher because not all asset managers have provided flows data’. (Figures for August will be released later this month.)
‘The problem when a lot of funds become suspended is that redemptions get funneled through the few that remain open,’ Molica said. ‘There is a lot of uncertainty around the issue of Article 50 being triggered. Commercial property assets are illiquid and managing them in an open-ended fund structure creates many challenges. That mismatch means that funds might have to remain suspended for months as they implement a controlled asset disposal program. I hope that funds put themselves in a strong enough position to handle redemptions when they reopen.'
Some analysts believe that any write-downs on assets when funds do reopen will be lower than originally feared which, in turn, makes widespread redemptions less likely. It’s estimated that the write-down on assets will be 3% to 4% rather than the 10% that was initially touted.
At least nine investment firms suspended trading in their property funds in July, thereby freezing £18 bn out of a total of £24 bn invested in open-end property funds in the UK. Property funds managed by M&G, Aviva, TH Real Estate and Standard Life are among those that remain suspended. Canada Life reopened its fund earlier this month, whereas Aberdeen Asset Management lifted the suspension back in July.
A spokesperson for M&G confirmed that its property fund ‘remains temporarily suspended while the fund manager works to raise the cash levels of the fund’. A spokesperson for Aviva said that the suspension is likely to be in place ‘for at least six to eight months’ from the date of suspension.
UK equity funds have also been hit
It is not just property funds that have suffered in recent months. In the year to date, a staggering £18.11 bn has been pulled out of equity funds in the UK, according to Morningstar, although some of the money appears to have been reinvested in other UK funds specialising in assets deemed less risky, such as government bonds. In July alone, investors pulled £5.7 bn out of UK-based stock market funds, according to latest figures from Morningstar, marking the highest level of redemptions in three years.
Investors, including real estate investors, are clearly spooked following the Brexit vote which, in turn, has made them more pernickety. According to a survey released by Preqin on 8 September, investors globally are finding it harder to source attractive alternative investment opportunities via funds than they were 12 months ago.
‘Institutional investors remain committed to alternative assets and, in most cases, far more investors expect to grow their allocations to these asset classes than intend to reduce them,’ said Marc O’Hare, CEO of Preqin. ‘However, it is undoubtedly a challenging time for investors, with an increasingly congested market making it difficult to select the right investment manager or vehicle, while fund managers face a battle in standing out from the crowd and attracting fresh investor capital,’ he added.
Of the 490 institutional investors globally who took part in the survey, 57% of real estate investors and 54% of infrastructure investors said they were finding it harder to source investments compared to a year ago. At the same time 47% of private equity and 46% of fund investors stated the same.
Two UK-focused private closed-end real estate funds have had their final close since the Brexit, according to Preqin. Hermes Real Estate Senior Debt Fund closed on 26 July having raised €467.81 mln, according to Preqin. Mercer Real Estate Partners II – a value-add real estate fund - closed on the same date, having reached €274.84 mln, according to Preqin.
