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Property fund investors take 6% hit as withdrawals spark pricing switch

Property fund investors take 6% hit as withdrawals spark pricing switch

Investors in property funds run by Columbia Threadneedle and Kames Capital have taken a hit of around 6% after the managers repriced their funds to deal with mounting withdrawals amid Brexit fears.

Columbia Threadneedle has moved the pricing of its £1.5 billion UK Property Authorised Investment (PAIF) funds from an 'offer' to a 'bid' basis, dragging down the funds by 6.1%.

Kames Capital has done the same for its £711 million Property Income funds, resulting in a 5.7% hit for investors.

Both fund groups switched their pricing in December, as they were hit by redemptions amid falling stock markets and uncertainty over Brexit as the government was forced to abandon a parliamentary vote on its EU deal.

'Due to current market uncertainty, the Threadneedle PAIF and Threadneedle PAIF Feeder fund have recently experienced more money being redeemed than new money being invested,' Columbia Threadneedle said in a communication to investors.

'As a result it may be necessary for the funds to sell some of the property they hold to increase the level of cash in the funds. This will allow us to meet the demand of client redemptions.'

Columbia Threadneedle made the switch on 13 December, three days after prime minister Theresa May was forced to abandon parliament's vote on her Brexit deal.

Kames followed suit a week later, on 20 December, saying it 'may be necessary for the Property Income fund to sell some of its direct property holdings to manage liquidity'.

Both fund groups' moves echo the response of property fund managers to the wave of redemptions they faced following the Brexit vote.

A raft of property funds were forced to suspend trading in the summer of 2016, while others applied a range of mechanisms to effectively deliver exit penalties ranging from 5% to 17%.

Kames and Columbia Threadneedle's response to this latest wave of redemptions has been less severe, but it will reignite debate over the merits of holding illiquid assets like property in 'open-ended' funds.

City regulator the Financial Conduct Authority in October proposed tougher rules for such funds after the sector's bruising by the Brexit vote.

Open-ended property funds tend to come under pressure during times of market stress given their structure, which allows them to create more shares and buy more assets when they are enjoying investor inflows, and cancel those shares and sell those assets when they are hit with outflows.

Selling assets in response to outflows can prove problematic where a fund is invested in relatively illiquid assets like property. As well as being a much more protracted process than disposing of shares, selling properties can incur significant costs.

It is those potential costs of selling that have triggered Columbia Threadneedle and Kames Capital's pricing switch.

Moving to a 'bid' pricing basis is a common move by funds experiencing redemptions. 

In the case of the Kames funds, investors pay and receive the same price to buy or sell stakes. By moving to a 'bid' basis, this price is based on the assets of the fund, less the estimated costs associated with selling its properties. 

This is lower than the price of the fund under the 'offer' basis employed when the fund is enjoying inflows, which reflects the assets of the fund  plus the estimated costs associated with buying properties.

The switch from an 'offer' to 'bid' pricing basis has seen the price of units in the fund fall 5.7%, although investors can expect the value of those units to recover that fall if net inflows resume and pricing is switched back to an 'offer' basis.

The pricing of the Columbia Threadneedle funds is slightly different, as they feature a higher price for buyers than sellers, albeit the spread between the two is small on the institutional share classes that most investors through platforms will hold.

Both those buying and selling prices have moved 6.1% lower as a result of Columbia Threadneedle's move. 'When the funds revert to bring priced on an offer basis in the future there should be a corresponding positive performance impact,' the fund group said in its investor communication.

The pressure on UK property can be seen in the shares of investment trusts focused on the asset class. Shares in UK commercial property trusts are trading at a discount of 6.1% to net asset value (NAV), having traded on average in line with NAV over the last 12 months and reaching a premium of 9.2% at their high. But that is still above the 9.4% average discount at which they traded in the week after 2016's Brexit vote.

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