UK property funds holding £12b face reopening dilemma

London

THE UK's biggest property funds for mom-and-pop investors that were locked at the peak of the Covid-19 market turmoil have been given the all-clear to reopen. However, they are not rushing for the keys.

Funds holding almost £12 billion (S$21.4 billion) of commercial real estate halted trading in March, leaving investors to watch as office and shopping mall values headed south. Now they have a choice: reopen and risk a wave of redemptions, or stay closed and invite the wrath of investors.

"As soon as funds open, money will leave, that's undoubted," said Ben Yearsley, investment director at Shore Financial Planning. "Honestly, I think most won't reopen."

As the pandemic froze real estate markets in March, fund managers including Aviva and Standard Life Aberdeen were thrown a lifeline.

An industry committee said most properties could not be accurately valued, prompting a slew of freezes that prevented investors heading for the door.

On Wednesday, that group said the uncertainty had sufficiently eased, heaping pressure on managers to reopen.

Now, any failure by funds to reopen following their next valuations could be a signal they do not have enough cash if redemption requests have piled up since their freezing. That is despite many having relatively healthy cash buffers prior to the Covid-19 crisis upending markets.

Columbia Threadneedle said on Wednesday that it planned to lift the suspension of its £1 billion property fund. However, other managers - including Aviva and Janus Henderson - said in earlier statements that they will not immediately allow withdrawals even though the restrictions have been lifted.

Janus Henderson's board "has again formally reviewed the dealing suspension" and agreed that its affected property fund "should remain suspended to allow for the raising of additional liquidity", the fund manager said.

The invoking of so-called material uncertainty clauses in March meant managers were obliged to halt redemptions when 20 per cent or more of their assets fell under the hard-to-value criteria. Restrictions were then eased on several types of commercial property including offices and warehouses. That has now been extended to cover most shopping malls and stores - the worst-performing real estate in recent years.

Aviva said on Wednesday that the decision will help liquidity in the property market. While its Aviva Investors Property Fund remains locked, the firm will monitor the market and update investors as soon as it is practical, it said in a statement.

The novel coronavirus pandemic is the latest event to expose the mismatch between funds that allow daily withdrawals, but hold assets that take weeks or months to buy and sell.

After repeated blow-ups such as the aftermath of the 2016 Brexit vote, the Financial Conduct Authority (FCA) is considering imposing a notice period of as long as 180 days for redemptions, with a decision expected next year.

Investors who hold these funds through tax-efficient savings structures may have an extra incentive to sell their holdings. If the FCA's plan is implemented and the money is effectively locked up for six months, the funds could be excluded from such structures.

"I would expect that as soon as these funds reopen, many investors will be looking to sell their investments before any potential change in rules comes into force," said Ryan Hughes, head of active portfolios at AJ Bell. "This will force fund managers to start selling commercial properties into a very uncertain market."

The prospect of forced sales is likely to lift deal volumes in the UK real estate market that has been starved of transactions. That is particularly true for retail properties, where deals have plunged to record lows, making pricing especially hard to judge.

Increasingly, there is evidence that some buyers are willing to commit to deals for retail properties, provided the price is right.

The uncertainty clauses also impacted funds for institutional investors that are not traded daily and are more able to sell assets in time to meet withdrawal requests.

BlackRock, Schroders and Legal & General Group were among the managers to freeze funds holding assets that cater to larger clients. BLOOMBERG