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'Open-ended' funds doubted as property suspensions rise

Henderson, Columbia Threadneedle and Canada Life join groups suspending property funds amid debate over whether investment trusts would be better.

'Open-ended' funds doubted as property suspensions rise

Three more fund management groups have suspended trading in their physical property funds after being overwhelmed by sell orders from worried investors.

Henderson Global Investors cited ‘exceptional liquidity measures’ as it blocked dealing on its £3.9 billion UK Property fund and Columbia Threadneedle said it saw no immediate end to the flood of redemption requests sparked by the European Union referendum result as it ‘gated’ its £1.3 billion UK Property fund and prevented investors from selling.

Canada Life announced investors would be stuck for up to six months as it 'deferred' withdrawals from its range of six commercial property funds.  

Over £14 billion of investors’ money is now locked in property funds, following suspensions by Henderson, Standard Life Investments, M&G and Aviva. Since the EU referendum result on 24 June, the pace of withdrawals from property funds has intensified as investors have worried about the impact of the UK’s exit from the European Union and of reduced interest in UK property from overseas buyers.

The spate of suspensions – the first since the 2008 financial crisis – has revived a debate over the validity of holding illiquid property assets in ‘open-ended’ funds. Despite holding cash in reserve these funds have struggled with the volume of sales requests which have continued despite price changes and portfolio markdowns designed to discourage investors from leaving.

As liquidity levels have dwindled they have had to suspend the funds to give themselves time to sell properties and generate more cash to repay investors.

Financial Conduct Authority chief executive Andrew Bailey yesterday said the regulator may have to re-examine the rules for such funds, although he described the actions to suspend the funds as ‘sensible’.

Cathy Pitt, a funds partner with law firm CMS, commented: ‘Now that the FCA is reviewing open-ended funds, such as property funds, that hold illiquid assets, it might be timely for managers and investors to focus on closed-ended vehicles like Reits [real estate investment trusts] and property investment companies.'

'Closed-ended' funds get their name because they have a limited number of shares unlike open-ended funds where managers can create and destroy shares in response to investor demand. They are regarded as more robust than open-ended funds because it is not their managers’ responsibility to give back money to investors.

Investors wishing to exit a 'closed-end' fund, like an investment trust, simply sell their shares on the market, for whatever price they can get, enabling the manager to avoid a potentially damaging fire sale of properties to generate cash.

Adrian Lowcock, head of investing at AXA Wealth, said: ‘Investors should view the suspension of trading in property funds in the right light. The mechanism was put in place to protect investors. It prevents funds from becoming forced sellers of their assets.

‘This protects investors, whether they remain invested or not, from getting a lower price for the property asset being sold,’ he said.

However, he also liked property investment trusts, particularly as many had fallen to cheap levels with share prices between 15-25% below net asset value. He picked out Standard life Investment Property Income (SLI) and Schroder Real Estate (SREI) as potentially attractive to income investors with dividend yields of 6.8% and 5.5% respectively.

Henderson said in statement: ‘Despite a strong underlying portfolio, the decision was taken due to exceptional liquidity pressures on the funds, as a result of uncertainty following the EU referendum and the recent suspension of other direct property funds.’ It said investors would continue to receive income payments as normal.

Columbia said: ‘We have not been immune to the recent trend of retail outflows from the sector and so far these requests have been met from the cash balance retained within the Threadneedle PAIF [property authorised investment fund].

‘However, it is expected that these requests to sell will continue for the time being due to uncertainty in the market following the UK referendum result, therefore the temporary suspension of dealings allows sufficient time for the orderly sale of assets, and protects the interests of all investors.'

Henderson UK Property, co-managed by Ainslie McLennan and Marcus Langlands Pearse, is up 23.8% over three years to the end of May, mirroring the Citywire UK Physical Property sector average return.

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