Covid-19 commercial property fund suspensions
It’s happened again.
During times of market stress, open-ended property investment funds are occasionally ‘gated’, with investors facing restrictions before they can sell units and access their cash.
This happened following the 2018 Brexit referendum when nervousness prompted a bigger than the usual number of investors to redeem their property fund holdings.
Because the assets within property funds (primarily large, commercial properties) are relatively illiquid and take time to sell at a fair price, it makes sense to limit redemptions. The alternative, forcing a firesale of assets, would be bad news for all investors.
Following the latest bout of market volatility, prompted by the coronavirus pandemic, investors in property funds face a similar issue.
Today saw a number of high profile property funds announce they would postpone redemptions.
The preferred property fund within the portfolios we recommend to our clients is the Legal & General UK Property Fund.
We recommended this fund for a variety of reasons, including its sensible level of cash holdings (necessary to manage redemption requests under normal circumstances and to provide available cash to purchase attractive property investments), and diversification of property holdings.
As a fund holding within a wider portfolio of investment assets, it remains a suitable holding where recommended, even with the new temporary trading restrictions in place.
All of the investment portfolios we recommend are designed for the long-term, not for the short-term periods where a trading suspension would matter to your ability to sell units.
Because there is now a trading suspension in place, due to what Legal & General calls ‘market volatility and the exceptional circumstances in the UK property market.’
This suspension will apply to any trading instructions made on or after midday today, 18th March, for instructions place after midday yesterday, 17th March.
The suspension will remain in place until further notice.
The driver behind this trading suspension is, of course, the impact of the Covid-19 outbreak on global financial markets.
As a result, the fund’s independent valuers, Knight Frank LLP, introduced its material valuation uncertainty clause. The clause means it cannot be confident about the valuation of properties.
Therefore, in the interests of investors, and to satisfy their regulatory responsibilities, trading in the fund is suspended.
We’re living through extraordinary times, with no real precedent for what’s taking place in global financial markets. It’s entirely unreasonable to expect a valuer to base current valuation models on their existing market experience.
L&G stress that the funds have enough liquidity (cash) to see them through current redemption requests received to date. But until the current extreme market conditions settle down, and uncertainty around property valuations is removed, it would be inappropriate to permit trading.
Investors could be buying or selling units at an unfair (to other investors) price.
The fund provider pointed out that the fund’s strategic position is particularly well placed for the long-term UK property market outlook, reminding investors about its diversification across sectors and geography, and assets in locations they believe to be strong, and below benchmark vacancy rates.
From a sector position, the portfolio is overweight to industrial and alternatives (which they believe to have better long term dynamics) and underweight to the retail sector, which is currently the weakest part of the market.
The trading suspension will be reviewed on a regular basis and we will post more news here when we get it.
In the meantime, please do contact your Financial Planner if you have any questions.