The spate of property fund suspensions following the 'Brexit' vote is reminiscent of the financial crisis, when investors shouldered losses of up to 40% once they were finally allowed to head for the exit.
Around £18 billion of assets are now trapped in funds that have suspended trading, with a further £5.7 billion subject to double-digit discounts upon exit.
Standard Life Investments was the first to act, suspending trading on its £2.7 billion UK Real Estate fund. Similar suspensions quickly followed for the £4.4 billion M&G Property Portfolio, £1.8 billion Aviva Property Trust, £3.9 billion Henderson UK Property, £1.3 billion Columbia Threadneedle UK Property and six commercial property funds run by Canada Life.
Aberdeen Asset Management has now lifted a trading suspension on its UK Property fund, but imposed a 17% charge on exit, while Legal & General cut the value of its £2.5 billion UK Property fund by 15%. Investors in the Kames Property Income fund suffered a 10% cut and those in the F&C UK Property fund a 5% fall.
Property investors who suffered the wave of fund suspensions during the financial crisis will be hoping history does not repeat itself. Among the most notorious fund cases was that of New Star International Property, which lost more than 40% in less than a year and was suspended for 14 months.
But Jason Hollands, managing director of online stockbroker Tilney Bestinvest, said investors should expect a much shorter wait to get their hands on their money this time round.
‘Yes, in 2008 property funds were gating because of liquidity issues, but at the heart of that people thought the financial system was going to collapse. This is a completely different set of circumstances,’ he said, adding he expected funds to reopen within three to five months.
Professional investors stay calm
Meanwhile, professional investors with client money in the funds are refusing to panic. Wealth manager Dart Capital is invested in a number of the property funds that have been forced to suspend dealing, but is not worried, according to associate director of research Alexander George.
‘From our standpoint we are comforted by the fact the funds are engineered in a way that reduces potential downside,’ he said.
‘We take a longer term view when investing, and we don’t try and be overly tactical when investing in property, largely because of these liquidity issues. We think the funds that have gated are acting in the best interests of investors and we would prefer this to running down cash balances.’
‘Naturally the UK economy is in a period of uncertainty but as long as a sudden recession is not triggered we believe London property will remain a valued asset.
‘New buyers [will be] found within the market and these will come from overseas investors [buoyed by weaker sterling] once there is a greater level of stability.’
Dan Boardroom-Weston, head of portfolio management at BRI Wealth Management, is sanguine about the firm's holding in the Kames Property Income fund, hit by a valuation cut. The firm had moved client money from Henderson UK Property on fears of potential suspensions.
‘Despite what is going on, tenants are still paying rent, so investors are still getting that income,' he said.
‘When you are gated you just have to sit on your hands, there are no options. But there are other ways to invest in property and that’s what we are looking at. The discounts on real estate investment trusts right now makes them look attractive.’
'Open-ended' funds questioned
The wave of suspensions has also over the merits of investing in property through 'open-ended' funds. As these funds need to create and destroy shares - and buy and sell assets - in respond to investor demand, that can prove difficult when lots of investors want to exit a fund investing in an illiquid asset class like property.
While it might be straightforward for a UK shares fund manager to sell a chunk of Lloyds shares as investors redeem, it's a bit more tricky offloading an office block in Northampton.
'Closed-ended' funds, which have a limited number of shares, do not suffer from the same problem. While shares in property investment trusts have tumbled before mounting a partial recovery, investors have been at least able to get at their money.
But fund groups have defended the use of open ended funds for property investment. 'Under normal circumstances these funds work very well,' said Russell Chaplin, chief investment officer of Aberdeen Asset Management's real estate business.
‘These structures are an attempt to provide the best liquidity from an illiquid asset class,’ he said. ‘It is the best compromise between direct exposure and having liquidity.’
Some have questioned whether these funds should offer daily pricing given the illiquidity of their investments, or hold more cash in order to better cope with times of stress, but Camilla Ritchie, investment manager at Seven Investment Management, dismissed these arguments.
‘There are those who say that property funds shouldn’t be daily dealing. But retail investors would not see weekly or monthly dealing as very attractive,' she said, adding that holding a heavy weighting in cash would hurt returns.
‘With a large amount of cash it is not a pure play, and you might not get the sort of return you would otherwise expect from a property investment,' she said.
But for Naomi Heaton, chief executive of property investors London Central Portfolio, the events of recent weeks show that open-ended property funds are 'a broken model'.
They are providing liquidity in an illiquid asset through shares, but if there is a run on the fund, they cannot cope. If you had to have a fire-sale in a softer market, you'd have even bigger problems,' she said.
'Closed-ended funds have always been a more difficult sell because investors want to feel like they have an exit strategy, but at the end of the day, open-ended funds aren't really open-ended, because they can stop you taking your money out.'