Property funds are already suffering as a result of the vote for Brexit. On Friday 24 June Henderson wrote down the value of its £4bn Henderson UK Property Fund (GB00BP46GD34) by around 4 per cent, wiping £160m off the value of its assets in response to nervousness over the future of the market. It follows the company's decision in May to rebase the prices of the fund's units.
Henderson said "less conviction surrounding current prices in the property market" had prompted a reassessment of its portfolio by its external valuer, CBRE.
"There is an expectation currently among participants and observers that valuations in the UK commercial property market will face downward pressure following the result," added Henderson. "In the interests of treating investors fairly and until the independent valuation report can reflect evidence of market activity post the referendum result, Henderson has included a fair value adjustment in today's fund prices."
Henderson is also asking for weekly instead of monthly valuation updates to keep up with market moves and try to prevent investors from selling out at unrealistically high prices in a falling market.
"Henderson would advise clients considering transacting in shares of the fund to bear in mind the current increased uncertainty around realisable prices in the UK commercial property market before deciding to proceed with a transaction," it said.
Property assets are illiquid, so working out what they are worth is difficult, particularly when markets hit a turbulent patch. "Transactions in commercial property are infrequent and, given the uncertainty created by the Brexit vote, determining the fair price for a property is difficult in the absence of transactional data," explained Laith Khalaf, senior analyst at Hargreaves Lansdown. "Giving too high a price to investors selling today would disadvantage those remaining in the fund, hence the price adjustment."
Property funds have been experiencing high outflows, both in the run-up to and in the wake of the EU referendum, and many readjusted their price structures in May to protect investors. Henderson UK Property was one of several funds, including M&G Property Portfolio (GB00B89X8P64), Standard Life Investments UK Real Estate (GB00BYPHP643) and Columbia Threadneedle UK Property Trust (GB00BQ1YHW31), that moved from an 'offer' to a 'bid' price, effectively cutting the price of their units by 5 per cent.
Funds with a unit trust structure have an 'offer' price, which new buyers pay, and a lower 'bid' price, which sellers receive, that reflects the spread in cost between buying and selling.
When property funds are doing well managers are happy to offer the same price to buyers and sellers, but with outflows increasing there is a risk that properties may need to be sold to redeem investors, so managers are moving to protect investors who stay in the funds from shouldering those costs.
On 9 May Henderson said: "It is industry practice to switch between the two pricing bases with the 5 per cent gap between the two considered the fairest means of ensuring existing investors in the fund, new investors and sellers of the fund receive the most appropriate price."
M&G has switched it funds' prices three times since May, returning to the bid price on 7 June for its M&G Property Portfolio and Feeder of Property Portfolio (GB00B8FWH509.
According to online investment platform RPlan.co.uk, investors are fleeing property funds in their droves, with the number of trades on its platform up 175 per cent over the weekend and 75 per cent of that activity in property funds.
After the UK's decision to leave the EU, investors fear lower foreign investment in property and a slowdown in prices rises, which have been the key generator of investor returns. Other concerns include more empty properties, job losses and companies moving overseas.
However, broker Stifel says although short-term pain is likely, "Brexit is unlikely to result in valuation declines of the quantum experienced back in 2008, given a low interest rate environment which may get lower, a weak pound, which will attract inward investment, and a lack of oversupply, which should mean rents remain sustainable".
