Was the property funds panic justified?
Property funds saga – where are we now?
Following the Brexit vote in June a number of open-ended commercial property funds available on the AJ Bell Investcentre platform suspended trading, instituted fair pricing, or significantly varied the terms of trading. This was in response to widespread redemptions, as portfolio builders attempted to withdraw cash from the funds in response to uncertainty following the EU referendum result.
However, reserves of cash and liquid assets quickly ran dry, and since the underlying assets – buildings – couldn’t be sold quickly, the funds chose to halt trading until they can build up enough liquidity to meet those redemptions.
The negative outlook for commercial property following the ‘Leave’ vote was understandable – it is often the first asset to tumble when economic turbulence hits.
Who has done what?
Below is a brief rundown of where we currently stand regarding property fund suspensions – unfortunately little has changed in the past two months:
- Aberdeen UK Property: froze dealings from 6 July until 13 July and introduced a dilution adjustment to fair value of 17%. This was subsequently reduced to 7% and then 5% in early August. On 2 September Aberdeen Fund Managers reduced this further to 3%. After 12 noon on 13 July, dealings recommenced and investors were able to buy and sell again, although by that time the fund manager had initiated a total asset property reduction” of 26%.
- Aviva UK Property Trust: not accepting instructions to buy, sell, transfer or switch units until further notice, with reports suggesting it may remain shut “for six to eight months” from the day it first announced its suspension.
- Henderson UK Property: announced a suspension of dealing as of 12 noon on 5 July, until further notice. It stressed regular savings plan transactions would not be enacted or back-collected once dealing resumes, nor will it be possible to reinvest income during this period, so any income received will be distributed. After a review of its position on 1 August, Henderson lowered its Fair Value Adjustment from 5% to 3.5%.
- Kames UK Property: announced an initial 5% downward adjustment to fair pricing on June and then increased this to 10% owing to continued market volatility on 7 July. On 16 August the fund manager cut this to 8.5%, equating to 6.2% of the value of the fund at that point in time.
- L&G UK Property: kept trading throughout – initially announced a large discount to NAV of 15% for anyone wanting to sell, this has gradually closed up to 10% on 15 July and 7.5% on 27 July.
- M&G Property Portfolio: announced a suspension of any buy or sell orders from noon on 4 July. On 1 September it confirmed the suspension would remain in place but cut the Fair Value Adjustment from £150m to £75m. In addition, it revealed that as at 23 August the Fund’s cash position had risen to 6.7%, with assets under management of £3.96bn.
M&G says it believes a “more normal” commercial property market combined with a fund cash holding target of 12.5% - plus additional cash for working capital and likely client redemptions - will provide a suitable environment to lift the suspension.
- Standard Life UK Real Estate: suspended dealing from noon on 4 July. This was reviewed on 28 August and will continue to be reviewed every 28 days. The fund has ceased to collect cash from regular savings and investment plans and will advise everyone once the suspension is lifted. Initially an adjustment of 5% to the underlying property assets of the fund was made on 27 June 2016. This has since been reduced to 3.5% and then 3% on 29 August.
- Threadneedle UK Property: suspended all buy, sell and switch transactions as of noon on 6 July. Dealing will recommence when the fund manager believes it will have sufficient liquidity to meet redemptions and protect the interest of investors who stick with the fund. Threadneedle will continue to calculate a valuation and publish a daily price on its website and investors will be able to request a valuation.
Light at the end of the tunnel?
My colleague Russ Mould explained in a previous article on property funds why the fortunes of the UK’s two largest property investment trusts – F&C UK Real Estate Investments and Schroder Real Estate – could provide some guidance in deciding whether or not we were about to see a repeat of the financial crisis.
The investment trusts fell by 60% and 90% respectively, from peak to trough, during the crisis, but rallied in the immediate aftermath of the Brexit vote. A sustained price rally could be viewed as positive for the sector, and while it is still early days the share price of both the Schroder and F&C trusts have surged in recent weeks.
The F&C trust bottomed out at 102p on 5 July and now stands at 125.4p, while the Schroder trust hit a low of 44p before bouncing back to 57.5p.
The shift in discounts to Net Asset Value on the two trusts also suggests someone, somewhere believes the negative reaction to property post-Brexit vote was overcooked. Both were trading at discounts of 20-25% in the immediate aftermath of the referendum result, but the Schroder trust discount shifted to 13.6% in July and now stands at just north of 7%.
Similarly, the F&C trust has swung from a discount of 12% in July to just 4.7% today.
Follow the money
Property funds saw outflows of £792m in July, according to the latest data from the Investment Association, as investors sought safety from the post-referendum fallout.
The data, released by the investment trade body towards the end of August, suggests investors have instead turned to more cautious asset classes such as fixed income and multi-asset funds, and absolute return strategies.
Fixed income sales for the month were £1.1bn, the top-selling asset class in July, followed by money market funds (£410m), and mixed-asset funds (£195m). Alongside property funds, equities also saw significant outflows (£2.2bn).
However, it’s worth noting that whenever you find yourself on the side of the majority, it’s probably not a bad time to pause and reflect on the fundamentals of the market.