Property Market Brexit Effect is Simply Short-Term Blip
Analysts have rejected fears that moves by several UK property funds to suspend dealing could signal a wider market meltdown.
On Monday, Standard Life blocked investors from withdrawing money out of its £2.9billion UK Real Estate Fund after a rush for the exits, and yesterday Aviva and M&G followed suit with their property funds.
The fund giants have temporarily barred investors from buying or selling units to avoid having to dump their portfolio of commercial properties at fire-sale prices, and other fund managers may do likewise.
This has rung alarm bells as funds from Standard Life, New Star and others also blocked sellers in 2008, at the height of the financial crisis.
Many ordinary savers have put their money into these funds as they can pay income of more than four per cent a year, with capital growth if property prices rise.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said more property funds could come under pressure in the wake of the Brexit vote, but the problem lies with the structure of some funds, rather than the UK property market.
The funds affected are “open-ended” which means if investors withdraw their money then fund managers have to sell assets to cover the cost.
However, these funds invest in commercial property, such as office blocks, shopping centres and warehouses, which are “illiquid” meaning they often cannot be sold in a hurry to meet the cost of investor redemptions.
Khalaf said Hargreaves Lansdown does not recommend investing in open-ended funds exactly for this reason.
However, some such funds acted early to forestall any crisis, for example, just before the referendum the £4billion Henderson UK Property fund imposed an effective five per cent penalty on investors who wanted to withdraw their cash, by switching from “offer” to “bid” pricing, while Aberdeen, Aviva, M&G and Standard Life have all done the same.
Henderson also holds 15 per cent of its funds in cash to cover redemptions, while Aviva holds 9.3 per cent, giving them added protection.
Closed-ended investment trusts such as F&C Commercial Property, Schroder Real Estate and Standard Life Investments Property Income Trust do not need to sell property to cover redemptions, but their shares could fall in value if investors panic and sell.
Brian Dennehy, managing director at FundExpert.co.uk, said the Henderson and M&G funds are protected by large cash buffers: “This is nothing like 2008. The panic should pass as low interest rates and the cheaper pound will make commercial property more attractive.”
He added the Brexit effect will disappear as political stability is re-established following the Tory leadership election and as Chancellor George Osborne and the Bank of England act to boost the economy.
“Events such as the US slowdown, Chinese debt and Italian banking crisis will become the main worry. Indeed this could even make UK property relatively attractive to global investors.”
Advisers have said that property funds are long-term investments and most savers should simply sit tight rather than rushing to sell.