A number of commercial property funds have stopped investors taking out or putting in money after a deluge of withdrawal requests in the wake of the vote to leave the European Union (EU). It follows the decision by a number of funds to rebase the price of their units over the past two months and by Henderson UK Property Fund (GB00BP46GD34) to write down the value of its portfolio by 4 per cent, or £160m.
Property funds have been experiencing high outflows, both in the run-up to and in the wake of the EU referendum, with the Investment Association reporting that during May property funds experienced a net retail outflow of £360m.
Trading in Standard Life Investments UK Real Estate Fund (GB00BYPHP643) has been suspended, although this will end as soon as practicable and will be formally reviewed at least every 28 days.
"The decision was taken following an increase in redemption requests as a result of uncertainty for the UK commercial real estate market following the EU referendum result," said the company. "Unlike investing in equities, the selling process for real estate can be lengthy as the fund manager needs to offer assets for sale, find prospective buyers, secure the best price and complete the legal transaction. Unless this selling process is controlled, there is a risk that the fund manager will not achieve the best deal for investors in the fund, including those who intend to remain invested over the medium to long term."
Standard Life Investments UK Real Estate Fund currently has 13 per cent of its assets in cash.
Aviva Investors Property Trust (GB00B7RBQM86) has suspended trading until further notice, while IC Top 100 Fund M&G Property Portfolio (GB00B89X8P64) says its suspension in trading is temporary and it will also review it every 28 days.
Aviva says that "over recent months we have been experiencing higher than usual volumes of requests to sell units in the trust, and this coupled with challenging market conditions in light of investor sentiment regarding the EU referendum, has reduced the amount of cash held by the trust. As it takes considerable time to sell properties, we have had to suspend dealing until the amount of cash increases."
This fund had 9.3 per cent of its assets and M&G Property portfolio had 7.7 per cent of its assets in cash at the end of May.
Aviva had been planning to convert its trust into a more tax-efficient 'property authorised investment fund' (PAIF), but now says: "It is still our intention to convert the trust into a PAIF, however as the trust is suspended from dealing until further notice, we are unable to proceed with our plans."
Investors can find further details on the Aviva Investors Property Trust at https://uk.avivainvestors.com/gb/en/individual/aipt-suspension.html
Open-ended property funds also suspended trading during the financial crisis when they were unable to meet redemptions due to the difficulty in selling buildings to raise cash. "This is part of the problem with investing in open-ended property funds, and one of the reasons we don't recommend them to investors," says Laith Khalaf, senior analyst at Hargreaves Lansdown. "Property does offer diversification, and a reasonable yield compared with government bonds, but investors must be willing to accept high costs and a lack of liquidity when the market turns down."
Investors cannot ask the managers of property investment trusts for their money back: if you want to dispose of an investment trust holding you have to sell its shares on the secondary market. However, when many people sell an investment trust it depresses the share price and the trust can swing out to a very wide discount to net asset value, as happened to property trusts during 2008. So even if you can sell this might be at a much lower price than you bought.
"Given the outflows commercial property seems to be experiencing, this could well put downward pressure on prices," adds Mr Khalaf. "The risk is that this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilises."
But Brian Dennehy, managing director of research hub FundExpert.co.uk, says: "It is not like 2007-08 when some funds also suspended dealing. Back then property prices had been inflated by too much debt and speculation. Those two features are largely absent now."
Some analysts expect commercial property returns to be lower in 2016 as rental growth has been slowing.
"But it is important to remember that over the longer term 75 per cent of the return from commercial property comes from rental income and rental income growth," says Paul Milburn investment analyst at Lowes Financial Management. "For the moment, we will continue to allocate to our favoured property funds."
And Darius McDermott, managing director of Chelsea Financial Services, says investors in property funds that have not suspended trading "should be aware that there may be very high exit charges for [selling out], as most physical property funds have already had fair value adjustments and moved from offer to bid pricing. I would emphasise that long-term investors in the asset class, who would otherwise not change their investments, should not be panicked into making a move. Property is still a good diversifier in an overall portfolio and yields on these funds may also increase, which will be a positive for income investors."