Three British property funds halt trade in first sign of post-Brexit seize-up

Bank of England governor Mark Carney at a news conference at the Bank of England on July 5, 2016.
Bank of England governor Mark Carney at a news conference at the Bank of England on July 5, 2016.PHOTO: REUTERS

LONDON (REUTERS) - Three British commercial property funds worth about £10 billion (S$17 billion) suspended trading within 24 hours, in the first sign of markets seizing up since Britain's vote to exit the European Union sent asset prices into a tailspin.

Policymakers rushed on Tuesday to emphasise that the seize-up was confined to the sector of "open-ended" funds in real estate that normally allow investors to exit at will, and did not signal a liquidity problem in wider financial markets.

However, other shares and funds in the commercial property sector also faced a sharp sell-off on Tuesday as the implications set in that assets could be due for a fall.

Commercial real estate has wider implications for the financial system because it is often used as collateral by companies that borrow from banks.

The three suspended funds collectively account for nearly a third of the £35 billion in open-ended British commercial property funds, which the Bank of England had flagged as a major risk ahead of the June 23 vote.

The £4.4 billion Property Portfolio run by M&G Investments, the fund arm of insurer Prudential, was the latest to go on Tuesday afternoon after a run on the fund from investors seeking to take their money out.

Insurer Aviva's fund arm had earlier stopped trading in its £1.8 billion UK Property Trust, following in the steps of rival Standard Life Investments, which suspended a £2.9 billion fund late on Monday.

The M&G fund owns 182 properties including the New Square Bedfont Lakes office park near Heathrow Airport, while Aviva's owns the Omni Leisure Centre in Edinburgh, among others. The Standard Life fund, meanwhile, owned 124 properties at the end of May including Monument Mall in Newcastle.

While open-ended funds tend to hold a pile of cash or similar assets to manage redemptions, in a worst case scenario they could turn into forced sellers of buildings in a falling market as more investors seek to redeem. Suspending trading is a measure designed to prevent that from happening.

The head of Britain's financial markets regulator, Andrew Bailey, said on Tuesday the Standard Life move showed the liquidity mismatch needed to be addressed and that he was in"very close touch" with investment funds over the issue.

"It does point to issues that we need to look at in the design of these things, because it comes back to my fundamental point about holding illiquid assets in open end funds that revalue and are required to be revalued," said Bailey, CEO of the Financial Conduct Authority. "My own feeling is... that we will need to come back and look at those."

Other leading British property fund managers including Henderson Global Investors, the fund arm of Legal & General , Aberdeen Asset Management and Kames all said they had already cut the value of their assets to better reflect market pricing or made moves to price funds more regularly, but had yet to suspend any funds.

Columbia Threadneedle said it had yet to make any changes to its property fund but was monitoring the situation.

Bank of England Governor Mark Carney said on Tuesday that British financial markets were less vulnerable to a shock than they were at the time of the financial crisis in 2008.


Among other large holders of commercial property which could be hit if the market jitters turn into a longer-lasting sell-off are the banks, which are due to report their half-yearly results in the coming weeks.

Royal Bank of Scotland had UK commercial real estate exposure of £25.24 billion, Lloyds about £12.7 billion and Barclays about £11.6 billion at the end of 2015, according to their annual reports.

HSBC Holdings had exposures of US$26.3 billion (S$35 billion) to commercial real estate in Europe at the end of 2015, although it did not specify its exposure to the UK market. Standard Chartered, meanwhile, had no exposure to the UK.

Fidelity International Investment director Adrian Benedict said British commercial property still benefited from a falling pound, a planned corporation tax cut and the prospect of more BoE monetary easing.

Strong demand from investors across the globe looking for extra yield to pay pension holders during a period of low interest rates meant that liquidity was much better than during the last slump amid the financial crisis, he added.

"This is very different from 2008, very different... we're not really seeing an illiquidity crunch right now.

"We're seeing a small, relatively confined lack of liquidity in the open-ended real estate funds, but if they were to put their stock to the market, I'm pretty confident they would find a lot of interested parties. Whether that's at a price they want to sell at is another matter."

Just days before Standard Life Investments suspended its fund, it had put one of the buildings in the fund - in Orange Street, central London - up for sale.

Simon Hall of surveyors Hanover Green said the price tag of £11 million had not been changed as a result of the Brexit vote and there had been "very good interest" in the property.

While cash-rich foreign investors had been big buyers of UK property in recent years as a yield safe-haven amid global economic stress and had plenty more to spend, they may yet wait before investing more given the still-uncertain outlook for Britain as it negotiates its EU divorce, Benedict said.


Spooked investors sold out of a range of stocks connected to the industry on Tuesday, including property firms, listed real estate investment trusts, asset managers and insurers.

At 1457 GMT, Standard Life's listed real estate fund was down 7.4 per cent, while F&C Commercial Property Trust had fallen 6.1 per cent and the Schroder Real Estate Investment Trust was down 8.6 per cent, albeit all off their lows.

Listed funds have a fixed number of shares which can be sold on an exchange by investors wanting their money back, and unlike open-ended funds do not have to sell assets to meet redemptions.

"When open-ended funds close the gates the market starts getting nervous," said Collette Ord, an investment trust analyst at Numis said. "The danger is if open-ended funds have to sell assets at distressed levels, that will then lead to price discovery and force listed trusts to also write down assets."

Of the 10 listed property funds it tracked, Numis data on Tuesday showed the average fund was trading at a 13.1 per cent discount to the value of its assets, which are typically calculated on a quarterly basis.

Concerns that weaker consumer sentiment could spread to other investments added to pressure on asset managers and insurers, which are already grappling with stubbornly high investor outflows and a dearth of investment income. Schroders was down 4.4 per cent, Legal and General 6.3 per cent and Standard Life itself 5 per cent.

Goldman Sachs, Barclays and Credit Suisse are among major banks forecasting a recession in the UK in the second half of 2016 or early 2017 with firms holding off on hiring and capital spending as a key reason.