(Update) Henderson, M&G and Standard Life Investments have lowered share prices on their big commercial property funds in response to a spike in withdrawals by investors worried by the prospect of a ‘Brexit’ result in next month’s European Union referendum.
The three leading investment groups have switched their bricks and mortar funds from the usual ‘offer’ price to the lower ‘bid’ or ‘mid’ price. This reduces the value of over £13 billion held in the funds by between 5% and 6.25%, effectively putting investors at the lower end of the ‘spread’ between the prices at which investors normally buy and sell their funds.
The moves have outraged some investors who feel they are being punished although the fund groups deny they are doing this. They say lowering the price is the fairest way to ensure that investors who sell their holdings share in the costs incurred in the disposal of properties. They argue that if they didn’t do this, remaining investors would be hit with higher charges.
Standard Life Investments was the latest to act, announcing on Friday it had swung the £1.5 billion SLI Ignis UK Property fund managed by George Shaw to its ‘mid’ price, a reduction of 5.5% on the previous level.
'The overall process is designed to ensure the fair treatment of all investors and prevent investors being disadvantaged by the negative impact of transactions costs associated with an increase in either inflows or outflows,’ the company said in a statement.
This followed M&G, the investment arm of Prudential, the FTSE 100 pension and savings group, which shifted £7.7 billion in its Property Portfolio and Feeder of Property Portfolio funds from the ‘offer’ to the ‘bid’ price, a cut of 6.25%.
Henderson Global Investors triggered the wave of price switches on Monday, putting its £4 billion UK Property fund on to the lower ‘bid’ price, 5% less than the previous ‘offer’ price.
The pricing changes comes as the groups experience – or anticipate – a period of net outflows as more investors sell their holdings and take profits after several years of good returns from commercial property following the financial crisis.
In recent months withdrawals from property funds have increased in response to the government’s hike in stamp duty on investment properties and to a cooling in interest from foreign investors ahead of the 23 June vote on the UK’s EU membership.
A vote by Britons to leave the EU would likely damage the property market in London and South East, where the funds invest a big chunk of their assets. Some international finance companies would move their offices from London to Europe, hitting property and rental values in the City.
Property prices would also be vulnerable to the slowdown in the economy and a fall in the pound which, the Bank of England warned this week, ‘Brexit’ would probably precipitate.
All three funds hold between nearly 10% and 16% of their assets in cash and the groups insisted there was enough liquidity in them to deal with withdrawal requests from investors.
M&G said of its two property funds run by Fiona Rowley that: ‘The decision is a reflection of current flows, and is not related to the liquidity position of the fund. It is designed to ensure equitable treatment for both transacting clients and those who remain invested. The pricing basis is monitored on an ongoing basis and is managed in line with fund flows,’ the company said.
The price will be switched back to the higher ‘offer’ price when inflows resume, the companies said.
Henderson, whose UK Property fund is managed by Ainslie McLennan and Marcus Langlands Pearse, echoed that: ‘In other words, it is about being fair both to transacting clients and to clients who remain invested in the fund,’ it said.
Another statement on the M&G website explains why the prices of both bricks and mortar funds can ‘swing’ this way.
‘Each day we value the assets of the M&G Property Portfolio on both an “offer” basis (how much they would cost to buy) and a “bid” basis (how much the fund would receive if they were sold).
‘The difference between the two, known as the “spread”, is currently around 6.25%. This reflects the costs of buying and selling properties, in particular Stamp Duty Land Tax paid on purchases which can account for up to 5% of the property value.
‘The dealing prices we publish are on either the offer basis or bid basis, depending on whether people are generally buying fund shares (the fund is in “net inflow”) or selling shares (the fund is in “net outflow”). Should fund flows move from net inflow to net outflow, the dealing prices may “swing” from an offer basis to a bid basis and fall by the extent of the spread.
‘On the other hand, should flows move from net outflow to net inflow, the dealing prices may rise by the same extent. For large deals (regarded as deals in excess of £50,000) the dealing price you receive may be different from the published price. If you are buying shares, you may receive a price that is higher than the quoted offer price. If you are selling shares, you may receive a price that is lower than the quoted bid price.’
For more information on this story please read: ‘Henderson protects property fund from “Brexit” pain.