Property fund redemptions
Could commercial property fund investors experience a repeat of the suspensions and price adjustments experienced following the 2016 EU Referendum result?
Figures showing an increase in outflows from UK direct property funds towards the end of last year have raised investor tensions in this sector.
The figures from fund research group Morningstar show investors withdrew £450 million from property funds in the final quarter of 2018.
During December alone, £285 million was taken out of these funds
By way of comparison, investors withdrew £465 million from UK direct property funds in June 2016, in the days immediately after the EU Referendum.
They took out a further £330 million from property funds in July 2016.
The data on property fund withdrawals comes shortly after the financial services regulator, the Financial Conduct Authority (FCA) revealed it has increased its scrutiny of property funds, looking closely at daily liquidity levels.
The issue with these commercial property funds is their illiquid assets within an easily traded fund structure.
Mass outflows from a property fund are problematic for a fund which has its units priced daily, but its underlying assets valued less frequently.
Properties which are often worth millions of pounds cannot be sold quickly to satisfy investor demands for redemptions. As a result, property funds tend to hold healthy cash balances to cope with investor redemption requests, without the fund manager being forced to sell a property.
When investors wanted their money back in the wake of the EU Referendum, funds had to suspend trading, creating enough time to realise assets to pay investors back, or alternatively adjust the unit price of the fund, to more fairly reflect the value of underlying assets.
These suspensions or unit price adjustments are only relevant for investors who need to sell their property holdings, with long-term investors unaffected by these short-term measures to manage liquidity.
With continued Brexit uncertainty, it’s little surprise that investors are once again nervous about the prospect for commercial property funds.
Despite continued low interest rates, making borrowing to fund property developments and investments more attractive, the decision for the UK to leave the European Union does seem to have dampened demand from overseas investors in UK commercial property.
Fears around a no-deal Brexit are further spooking investors, which could account for the spike in property fund outflows experienced towards the end of last year.
What’s unusual about this rise in redemptions is that property was one of a relatively few positive performers for investors last year.
The rise in redemptions in the final quarter of last year coincides with falls in global equity markets, despite commercial property typically negatively correlated with equity assets.
As part of a well diversified portfolio, with investors taking the long-term view, we believe property remains an important mainstream investment asset class.
It will be interesting to see how property fund managers address any rise in redemptions over the coming months, with dealing suspensions and pricing adjustments of course only relevant for investors who need to sell during this time.