PropertyDec 20 2016

Property funds boost cash position after suspension saga

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Property funds boost cash position after suspension saga

Commercial property funds have been topping up their cash position in light of the sector's crisis earlier this year.

Several large commercial real estate funds were forced to suspend trading in July when investors panicked and pulled out of the investments following the Brexit vote.

The main issue centred on the mismatch between the liquidity of the fund structure and the illiquidity of the underlying investments.

The six asset managers which paused trading in their property funds have since increased their cash position in order to boost liquidity within the funds.

A spokesman for Aberdeen Asset Management, which suspended its £2.6bn UK Property fund in July, said: “There’s clearly a lot of political and economic uncertainty at the moment and there will be going into next year.

“Also in our view property prices still remain full across much of the market.”

He said it therefore “seemed sensible” to maintain a cautious approach when managing the open-ended property fund. 

“That means it’s prudent for us to run the fund with a healthy amount of liquidity, which we are doing; if sentiment or pricing does shift then we will react appropriately using the tools at our disposal.”

Managers are holding high levels of cash to try to avoid running into problems, which will act as a drag on investor returns.Laith Khalaf

A spokesman for Aviva Investors said a “considerable effort” was spent rebuilding the liquidity of the £1.5bn Property trust while the fund was temporarily suspended.

He pointed out that at the end of November, its asset sales programme had increased the gross cash position of the investment trust to 19.8 per cent of net asset value.

The spokesman also said the cash position is likely to increase further in the short-term. 

“We believe the trust now has sufficient liquidity to enable dealing to resume on a sustainable basis.”

Standard Life Investment's £2.6bn UK Real Estate fund had around 15 per cent to 18 per cent liquidity before the European Union referendum, which dropped to nearly 7 per cent when trading was paused.

While the liquidity range for a fund of this type is normally between 10 per cent and 20 per cent, the Standard Life fund now has liquidity of 25.7 per cent.

A spokeswoman from Standard Life said: "Given what happened this year and the fact that Article 50 hasn’t been triggered yet, we’re comfortable with the liquidity level at the moment going into next year."

“As the search for yield intensifies within a world of low interest rates and nominal growth, the outlook for UK commercial real estate returns and income remains attractive,” the spokeswoman said.

In an update published at the end of last month, the manager of Henderson’s £3.2bn UK Property trust Ainslie McLennan said she took the opportunity to raise cash levels in an “orderly fashion” by selling a number of assets while the fund was suspended.

“From an investor perspective, this resulted in the crystallisation of good performance on properties that were sold, while retaining a portfolio of high-quality assets.,” she said.

M&G's Property Portfolio, which holds nearly £4bn assets, increased its cash position to 16.3 per cent at the end of last month, from the 6.7 per cent position recorded at the end of June.

Columbia Threadneedle also confirmed it has increased the cash position in its £1bn UK Property trust, due to realised property sales and client inflows.

All of the property funds have now reopened for trading.

Meanwhile, the Financial Conduct Authority is also examining the pricing structure of property funds as part of its review into the sector.

In July, Andrew Bailey, chief executive of the FCA, implied the redemption rules for open-ended property funds could be changed, despite regulatory experts questioning whether more red tape would be beneficial.

The regulator has confirmed it is looking into the way discounts were applied, as many investors suffered losses on their property investments.

This will form part of a discussion paper which will be issued next year.

The financial watchdog has been in close contact with these fund managers and continues to liaise with asset management groups as they keep the situation under review.

Laith Khalaf, senior analyst at FTSE 100 wealth manager Hargreaves Lansdown, said “some order” has now returned to the property sector, but warned the underlying risk of another big freeze remains.

He said: “Managers are holding high levels of cash to try to avoid running into problems, which will act as a drag on investor returns.”

katherine.denham@ft.com