Property fund providers have argued that the effective gating of investors’ money is standard practice, and those who own the funds knew what they were buying into.
Around £18 billion of assets is now trapped in funds that have suspended trading with a further £5.7 billion subject to double-digit discounts upon exit.
Furthermore, some firms have blamed the stampede of redemptions on impressionable retail investors, highlighting the relative calm in institutional-only funds.
But it is not that simple.
HSBC Open Global Property fund of funds manager Guy Morrell reduced his direct UK property weighting by almost 90% since before Brexit, down to 3.5% (as of 6 July), having previously held around 30% in the sector.
This arguably dispels the theory that the mass redemptions were due to a layman’s panic to some extent – the view that ‘sophisticated and informed’ investors would never crowd out in such a fashion. This in turn puts a harsher focus on the structuring of these vehicles.
‘We have an unusual set of circumstances,’ said Association of Real Estate Funds CEO John Cartwright, referring to Standard Life, M&G, Henderson, Columbia Threadneedle and Aviva’s recent suspending of trading in their UK property funds.
‘If we go back to the financial crisis, these funds didn’t suspend dealing – they stayed open, they sold assets, and redeemed assets. We are in different territory now because of the greater uncertainty; it is an event without precedent.’
One of the main selling points of the open-ended investment company (Oeic) structure is daily pricing – a facet implemented at the behest of the regulator to allow investors to alight as easily as they boarded.
However, Russell Chaplin, CIO of Aberdeen Asset Management’s real estate business, concedes that it is essentially trying to put a square peg into a round hole.
‘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.’
Part of this involves a fund maintaining a liquidity balance. These buffers, of which funds hold a maximum allowance ranging between 15% and 40% of assets, can include cash or near-cash instruments, such as short-dated bonds, futures or shares. This is meant to ensure managers can meet redemption requests without having to rush through the time-consuming process of offloading bricks and mortar.
For context, when Aberdeen issued a temporary suspension notice the fund was already defensively positioned. Aberdeen UK Property was holding ‘around 25%’ in liquid assets out of a possible 40% – a maximum threshold which the firm said has not been reached since the financial crisis.
‘Under normal market circumstances these funds work very well,’ Chaplin added. ‘It is only in times of stress that the issues start to creep in.’
Over the last few weeks it has become apparent that regardless of how long or short-lived it proves to be, this is one of those ‘times of stress’, and cash buffers are not sufficient to cover the sheer volume of withdrawals.
One suggestion is for these funds to simply up their liquidity allowance, but Camilla Ritchie, investment manager at Seven Investment Management, believes this would render them a quite different proposition.
‘You could argue that it is not really a property fund,’ she said. ‘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.’
Keeping the door ajar
While many property funds simply suspended dealing, Aberdeen adopted a different approach, opting to allow investors to withdraw funds, but only after a 17% discount had been applied to the 30 June unit price.
Still, considering the share price at the time of implementation was – according to Aberdeen – representative of a 2% fair value adjustment to longer-term values, the levy was not as heavy as it first appeared.
But some have suggested that the ‘fair value’ figures touted are arbitrary and based on trades that have not been made yet.
‘Our funds are valued by a third-party appraiser,’ Chaplin countered. ‘Our managers then decide whether the advice we’ve had from the valuer is appropriate.
‘We look at primary evidence – asset price movements pre- and post- the referendum – and secondary evidence, such as Reit prices and how much uncertainty would be attached to a “normal” valuation.’
Leaving aside questions over how the prices are determined, the Financial Conduct Authority reacted to the suspensions by pondering the effectiveness of daily pricing.
‘There are those who say that property funds shouldn’t be daily dealing,’ said Ritchie. ‘But retail investors would not see weekly or monthly dealing as very attractive – they want to be able to access their money.’
Cartwright added: ‘It isn’t the frequency of pricing that is the issue – it’s the notice period that we should be looking at. If an investor says that they want to exit the fund then it should give the manager time to sell underlying assets to meet that redemption requirement.’
For Naomi Heaton, chief executive of London Central Portfolio, the events of recent weeks, and those back in 2009, underline the fact that the open-ended property fund model is 'broken'. She says investors should focus on closed-ended vehicles that have permanent capital and can ride out the volatility.
'It's 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.'