Media Centre

14th July 2016
Help! I'm a property investor, get me out of here

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Within a week of the referendum result that shocked many, open-ended property funds have suffered a wave of redemptions forcing several asset managers – Aviva Investors, M&G and Columbia Threadneedle to name a few – to suspend trading on more than £18 billion in sector assets.

So, with the drawbridge up, what can investors expect next and is there a way out?

Recourse is limited for investors in these funds. New FCA chief Andrew Bailey has publicly questioned the daily pricing nature of funds for such a notoriously illiquid asset class but when Wealth Manager asked the regulator, if they had any advice for concerned investors, a spokesperson said they had nothing to add.

Dart Capital is invested in a number of large funds that have been forced to suspend dealing, but is not worried, as associate director of research Alexander George explains.

‘From our standpoint we are comforted by the fact the funds are engineered in a way that reduces potential downside,’ he said.

‘We take a longer term view when investing, and we don’t try and be overly tactical when investing in property, largely because of these liquidity issues. We think the funds that have gated are acting in the best interests of investors and we would prefer this to running down cash balances.’

BRI Wealth sold out of its holding in the £3.5 billion Henderson property fund a few months ago because of fears about gating, and instead has a holding in the smaller, £497 million Kames Property Income fund, which has a high cash weighting. Although it did not suspend like the others, Kames increased the discount on redemptions from 5% to 10%.

Dan Boardman-Weston, head of portfolio management at BRI Wealth, is still constructive on property and said: ‘Despite what is going on, tenants are still paying rent, so investors are still getting that income.

‘When you are gated you just have to sit on your hands, there are no options. But there are other ways to invest in property and that’s what we are looking at. The discounts on Reits right now makes them look attractive.’

Alarm around open-ended property funds is widespread because last time this happened during the credit crunch the market went on to give up around 40% in capital values. Some of the hardest hit and heavily-levered large property funds, such as New Star International, remained closed for up to two years.

Tilney Bestinvest managing director Jason Hollands pointed out that while the fund structure is the same, the wider market is now more notable for its differences to 2008 than for its similarities.  

‘Yes in 2008 property funds were gating because of liquidity issues, but at the heart of that people thought the financial system was going to collapse. This is a completely different set of circumstances,’ said Hollands, who expects funds now closed to remain shut for between three to five months.

The bulk of today’s coverage, unlike 2008, has been aimed squarely at the post-Brexit political fallout rather than wide-scale deleveraging. John Husselbee, head of multi-asset at Liontrust, says what is happening now is to be expected and investors need to be aware this is a risk when buying open-ended property exposure.

‘That this failed to make national front pages suggests there is less economic carnage to hang headlines on post-Brexit than in the wake of the Lehman’s collapse,’ said Husselbee, who has a zero weighting in property.

‘Given we had similar issues eight years ago, it seems a stretch to imagine there are thousands of investors in property funds unaware of what can happen during periods of market stress.

‘There will be inevitable concerns about how these funds are sold, but no informed buyer should be surprised by the events of recent days. If you want the liquidity premium available on property, there are liquidity risks to consider.’

So, if investors in these funds have entered with their eyes open to the risks, how long will they have to wait for before trading resumes?

Dart Capital’s George is hoping new buyers will enter the market soon. He said: ‘Naturally the UK economy is in a period of uncertainty but as long as a sudden recession is not triggered we believe London property will remain a valued asset.

‘New buyers [will be] found within the market and these will come from overseas investors [buoyed by weaker sterling] once there is a greater level of stability.’

Hollands says these property mandates would be better run under monthly rather than daily pricing regimes, but overall he says stability could mean a return to activity within the property market.

‘What will drive this is when we see transaction levels in the property market increase.’