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Unloved malls plague top UK property funds
MOM-AND-POP investors are fleeing UK property funds at the fastest pace in more than two years, roiling an almost US$24 billion-corner of the money management industry.
Withdrawals from the biggest UK property funds accelerated in the final months of 2018 as the global equity market rout added to worries about Brexit and the floundering retail sector.
That's forcing several funds, including those managed by Standard Life Aberdeen and Nuveen, to sell real estate to meet client redemptions. The trouble is, many of the firms have already sold the family silver and now are left with assets few want.
The pressure on the firms to quickly bolster their cash buffers exposes the inherent weakness in the structure of these funds: their money is tied up in real estate, which takes months if not years to exit profitably, while their customers are free to withdraw any day.
Investors' growing anxiety about the UK potentially crashing out of the European Union (EU) without a deal is making it imperative for these property funds' managers to prepare for another exodus of cash.
While some funds are trying to offload assets, others are making it less attractive for customers to pull out.
All have so far held off on blocking investors from the exit, as they did in the aftermath of the Brexit referendum, to avoid a far bigger blow to confidence.
The problem many funds face is that they'd sold some of their most attractive assets - London offices and warehouses - to meet redemption requests in the panic that ensued after the June 2016 vote.
That has left them heavily exposed to the shopping malls and stores that have found few takers amid a slump in the UK retail property market.
"What everyone is doing at the moment is looking at their portfolios and working out how we recapitalise," said Richard Peacock, fund manager at Kames Capital. "We are pricing our fund on the basis that we are sellers, not buyers, of buildings."
That's because in the final months of 2018, 10 of the largest UK property funds that allow individual investors to withdraw daily saw the biggest drain on their cash buffers since the Brexit referendum, with almost £500 million (S$890 million) being pulled out, according to Morningstar data. Those funds jointly oversee almost £18 billion.
In response to the exodus, Kames Capital's £750 million Property Income fund last December started charging a percentage fee to investors who want to exit, a levy that's based on the estimated cost of selling properties. That will mean about a 5.7 per cent hit for those who now want to get their money back.
Several other funds including Nuveen's Janus Henderson UK Property PAIF have put buildings on the market, people with knowledge of the plans said.
Meanwhile, Standard Life's £2.2 billion SLI UK Real Estate Fund is trying to sell an office building in London's Southwark district after concluding that the market was too uncertain to offer its larger retail properties, the people said.
The property funds trying to divest real estate are confronting a lacklustre market for retail assets after the collapse of some chains and a series of restructurings that led to rent cuts.
Sales of all retail property totalled just £5.7 billion in 2018, the lowest since 2000, figures compiled by Property Data showed.
The spate of store closures in 2018 and concerns about future collapses in value "has scared people", according to Deian Rhys, a partner at law firm Simmons & Simmons. "A lot of retail assets are for sale unofficially."
The sector's woes forced mall landlord Capital & Regional to write down the value of its properties outside London by 10 per cent for the second half of the year.
That isn't good news for funds like the Aberdeen Investors UK Property Fund. Its assets have fallen by about 42 per cent since the referendum to roughly £2 billion, and a whopping 53 per cent of its holdings are now retail properties, even after selling a supermarket last month.
Regulators have proposed new rules designed to protect investors in such funds during periods of turmoil, but they won't come into effect until next year.
Still, not all property funds are in trouble.
Legal & General Group's (L&G) UK Property Fund - one of the few to have kept enough cash at hand to avoid barring redemptions in 2016 - has been rewarded by investors with its assets growing by more than £1 billion since.
L&G had already increased its cash holdings to 25.5 per cent in November, from 19.2 per cent in February.
Most other funds just aren't as combat ready, leaving their managers with the challenge of trying to pare their exposure to malls and stores to placate worried investors.
"We are all trying to position our retail portfolios to say that we are aligned with the themes that are successful," Mr Peacock of Kames Capital said.
"But guessing by the number of questions that I am getting from investors around the retail that we own, it must be accounting for some of the outflows and some of the risk in the sector now." BLOOMBERG