Your IndustryAug 11 2016

Post-Brexit vote concern over property funds

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Post-Brexit vote concern over property funds

Brexit fears caused a domino effect among property fund managers in the UK, with one after another firm announcing measures to prevent mass redemptions.

It was clear from data provided by FE, among others, that fund management groups were suffering as a result of poor consumer confidence in the immediate weeks after the vote to leave the European Union.

Fears - which have proved as yet unfounded - that overseas and domestic business owners might shelve plans to expand and take up new office space led to a wave of hot money flowing out of the UK commercial property sector and into ‘safer haven’ assets, such as international money market funds.

A table from FE, focusing on the UK property fund sector from 1 June to 5 July, highlights the number of people selling in the run-up to, and especially in the aftermath of - the Brexit vote.

Manager

Fund

Pf Delete

Rank

Henderson

UK Property PAIF

1228

1

Threadneedle

UK Property AIF

543

2

Standard Life Investments

UK Property Accumulation Feeder Trust

458

3

M&G

Feeder of Property Portfolio

436

4

Aberdeen

Property Trust

423

5

L&G

UK Property Feeder

411

6

Standard Life Investments

UK Real Estate Accumulation Feeder

360

7

L&G

UK Property

355

8

Aberdeen

UK Property Feeder

345

9

M&G

Property Portfolio

278

10

Aviva Inv

Property Trust

278

10

Henderson

UK Property PAIF Feeder

228

12

First State

Global Property Securities

208

13

Standard Life Investments

UK Real Estate

205

14

Threadneedle

UK Property Authorised Trust Feeder

194

15

Standard Life Investments

UK Property

177

16

Aberdeen

Property Share

168

17

Schroder

Global Real Estate Securities

147

18

HSBC

Open Global Property

130

19

Aberdeen

UK Property

109

20

Henderson had the most ‘deletions’ (sells) at 1,228, while Aberdeen’s UK Property fund registered the least number of sales over the period.

Gating

As a result of the knock in investor’s confidence following the Brexit vote, some fund management groups shut the doors by suspending trading in their Property funds. Even as late as 10 August, Aviva sent a note to clients suggesting trading in the fund could be suspended for six to eight months.

Aberdeen Asset Management and Legal & General Investment Management imposed a ‘dilution levy’ (or a ‘fair value adjustment’ or temporary penalty charge) on those wanting to withdraw their money, gradually reducing the level of additional charges over the past few weeks as liquidity was slowly restored in the portfolios.

Jonathan Wilcocks, global head of retail sales for M&G, says: “The temporary suspension in trading of the M&G Property Portfolio and its feeder fund is because redemptions reached a point where M&G believes it can best protect the interests of the funds’ shareholders by taking this action.

“Investor redemptions rose markedly because of high levels of uncertainty in the UK commercial property market following the outcome of the EU referendum.”

Adrian Lowcock, investment director of Architas, says: “I think the quick action helped stabilise things and prevented things getting worse.

“It is important to remember the reason for gating the funds was to protect investors, both those who wanted to remain invested and those wanting to sell.

While property values have fallen following the UK’s vote to leave the EU, investors appear to be taking a more measured assessment of property Martin Gilbert

“Given the sell-off was a knee-jerk reaction to the Brexit result, it was only likely to be short-term in nature.”

Indeed, by 1 August, weeks after Aberdeen imposed a 19 per cent dilution levy, Martin Gilbert, chief executive, announced the rebalancing in the portfolios and restoration of liquidity was over.

At the time this guide was published, there was still a 1.25 per cent dilution levy and a fair value adjustment of 7 per cent applies to the UK property portfolio, but Mr Gilbert says: “It is encouraging to see some calm and order returning to the UK property market.

“While property values have fallen following the UK’s vote to leave the EU, investors do now appear to be taking a more measured assessment of property as a long-term investment.

“We have worked hard to continue to offer liquidity to those who want or need it and remain entirely focused on protecting the interests of all investors in doing so.”

What advisers think

Doug Millward, investment manager for Lowes Financial Management: “For now, we believe property fund managers have been prudent, by implementing adjustments to the value of the underlying portfolio and suspending trading, to provide more realistic valuations and protect the unit holders.”

Laith Khalaf, senior analyst for Hargreaves Lansdown: “While things appear to be calming down for property funds, dilution levies are entirely dependent on fund flows and applied without prior notice, so investors are still playing lucky dip when they buy or sell one of these funds at the moment.”

Ben Willis, head of research for Whitechurch Financial Consultants: “Once one fund decided to gate, it caused a domino effect. We’d already seen mark-downs such as cancellation pricing, fair value adjustments, showing sentiment to the asset class had changed and investors were selling wholesale. The problem is if you try to stay open while others are becoming gated, you become the ATM for property investors trying to get their cash.”

Some damage has been done to the balance sheets of certain companies offering Property funds.

Following the Brexit vote Henderson Global Investors and Schroders both reported £2m outflows, which they attributed in part to post-Brexit vote uncertainty.

Schroders suffered a slight blow despite the fact it did not gate its property fund, as it does not have daily dealing and did not need to have enough liquidity to meet unit or share redemptions by the close of each dealing day.

Yet Tom Dorey, head of retail product for Schroders, does not think fund houses were too quick to gate their funds.

He says: “Soon after the referendum the Financial Conduct Authority (FCA) reminded managers to ensure they could treat retail clients fairly, and the managers acted accordingly.

“In a market with little transactional evidence managers had to act swiftly either to fair value their funds or suspend dealings in the interests of investors.”

Mr Dorey was referring to a guidance note from the Financial Conduct Authority issued on 8 July, which said: “Fund managers have a duty to act in the best interests of all investors.

“Therefore they must consider how to ensure the ongoing fair treatment of all investors in their funds in the context of current market conditions.”