Aviva Investors and M&G have joined Standard Life Investments in suspending trading in their big ‘open-ended’ commercial property funds, provoking fears that they believe the post-‘Brexit’ downturn in their sector will be worse than expected.
The ‘gating’ of the £4.4 billion M&G Property Portfolio and £1.8 billion Aviva Property Trust means investors in the 'bricks and mortar' funds will not be able to access their money, although they will continue to receive income payments and the portfolios will be managed as normal.
As with the Standard Life Investments’ £2.7 billion UK Real Estate fund, which was suspended yesterday, the companies say they have been swamped by redemption or sales requests from investors worried by the referendum result.
A statement from Aviva Investors read: 'The extraordinary market circumstances, which are impacting the wider industry, have resulted in a lack of immediate liquidity in the Aviva Investors Property Trust.
'Consequently, we have acted to safeguard the interests of all our investors by suspending dealing in the fund with immediate effect. Suspension of dealing will give Aviva Investors greater control in managing cashflows and conducting orderly asset sales in order to meet our obligations to investors wishing to redeem their holdings.'
M&G echoed this in its statement saying: ‘Redemption requests have now reached a point where M&G believes it can best protect the interests of the fund’s shareholders by seeking a temporary suspension in trading.’
All three groups say they have told the Financial Conduct Authority of their actions and say they will review the situation in 28 days’ time.
They say the suspensions are necessary to give them time to sell properties and generate the cash to give to departing investors.
The three funds have held big cash buffers of around 15% for some time, so the fact they have been forced to ‘gate’ shows there has been an intensification in the selling of property funds, which has been evident for some time.
Last week Standard Life Investments marked down the valuation of the UK Real Estate portfolio by 5%, with Aberdeen Asset Management knocking 3.5% off its main commercial property fund. They followed the example of Henderson Global Investors which on Friday 24 June, the day of the referendum result, slapped a 4% 'fair value adjustment' on the price of its £4 billion UK Property fund.
Previously, SLI had been among groups that ‘switched’ their property funds to a ‘bid’ price, which cut by around 5% the amount sellers would receive for their shares.
Commenting on SLI’s suspension of trading, Robert Duncan, real estate analyst at Numis Securities, said the company had clearly been surprised by the rush to sell.
‘Without wishing to be alarmist or sensationalist, Standard Life’s decision to close its open-ended property fund to redemptions concerns us. With investors already in effect being forced to accept prices which are around 10% lower (and don’t forget the fund was sitting on mid-teens liquidity), there is clearly fear that prices tomorrow will be substantially lower than pricing today.’
In its explanation on 24 June Henderson said it had asked its fund's independent valuers to temporarily move to weekly valuation updates, instead of monthly, until there was a clearer picture of market activity.
Henderson said: 'The UK referendum decision to leave the European Union means that there is less conviction surrounding current prices in the property market and this has been communicated to us by our independent valuers.
'There is an expectation currently among participants and observers that valuations in the UK commercial property market will face downward pressure following the result.'
Duncan expressed concern at the potential knock-on effect of the suspensions on the rest of the property market. He pointed out that the amount of money in open-ended property funds had more than doubled to £26.8 billion since the financial crisis. Some funds were ‘gated’ for long periods after the credit crunch after being locked in a vicious circle of falling asset values that threatened to put them in breach of their loan agreements, forcing them to sell properties and exacerbate the slump in the market and the hit to their portfolios.
On the stock market, property-related shares fell again as investors worried about the prospects for residential as well as commercial real estate in light of the economic slow down the decision to quit the EU is likely to cause.
Darius McDermott, managing director of Chelsea Financial Services, a fund broker, said the suspensions were frustrating for investors.
'If investors need to access their investments in other property funds in the very near term, they may wish to do so sooner rather than later, as some others may follow suit. However, investors should be aware that there will be very high exit charges for doing so, as most physical property funds have already had "fair value adjustments" and move from offer to "bid" pricing,' he said.
He urged long-term investors not to panic. 'Property is still a good diversifier in an overall portfolio and yields on these funds may also increase, which will be a positive for income investors.'