Property Funds suspension due to Brexit

 

Alongside Sterling, Property Funds have felt the greatest impact from the EU Referendum. Following the UK’s vote to leave the EU, it has increased the level of uncertainty around the impact on the UK Commercial Property Market and as such, has led to increased investment outflows from this asset class. We had already seen outflows beginning to increase prior to the Referendum, but the vote for Brexit has exacerbated the situation.


Part of the reason behind the increased outflows is that investors have previously built up large holdings in Property Funds in recent years on the back of their strong performance as well as the ongoing hunt for different income streams. As a result, some investors are reducing their allocations to Property as they look to take profits as well as owing to the uncertainty over the short-term future for this asset class that has been caused by the vote to leave the EU.


Whilst the initial impact on Property Funds was changes in their pricing basis as well as a move to more frequent valuations, we have now seen some of the largest fund managers in this market announce a temporary suspension of dealing in their respective funds. This was initially announced by Standard Life Investors, but has since been followed by Aviva Investors, Colombia Threadneedle, M&G and Henderson. These suspensions mean that more than half the UK Commercial Property Sector as measured by Funds under Management is now temporarily suspended. It also means that investors will be unable to either sell their holdings or purchase new shares at this time, though income payments should continue to be made as before.


The rationale behind the suspension is the very nature of investing in ‘Bricks and Mortar’ Property assets. Unlike a share or fund that tend to be easily tradeable, it often takes a considerable time to sell physical properties as the manager needs to offer such assets for sale, find prospective buyers, negotiate the best possible price and complete the legal side of the transaction. By temporarily suspending dealing in the fund, it enables the manager to look at selling properties at more competitive prices so that they are acting in the best interests of all investors and allows them to increase their cash positions in a controlled manner.


Our Position

There is a strong chance other Property Funds will follow a similar strategy even if it’s solely as a precautionary measure. Furthermore, the suspensions could further negatively impact on sentiment towards this asset class and cause investors to sell their holdings with other managers.


Although it would be understandable for investors to be concerned over the suspension of trading in their Property Fund, it must be borne in mind that this decision has been taken to protect their interests and should only impact on them if they were also looking to sell their holding.


As with other asset-backed investments, Property should be viewed as a long-term investment and held as part of a well diversified portfolio. Whilst there may be further price falls and suspensions in the short-term as the Property market adjusts to the likely continued uncertainty that will be caused by the negotiations of the UK’s exit from the EU, we do not feel that investors should panic at this news. Furthermore, this has come on the back of a period of very strong performance in recent years, and we retain our view that this asset class does offer diversification within a portfolio.




[ Date Posted: 22/07/2016 11:39:15 ]