Property fund managers were taken by surprise, not only by the result of the EU referendum on 26 June last year, but by the speed at which investors began pulling money out of their funds.
Many fund houses responded by suspending dealing on daily dealt property funds or applying temporary pricing adjustments, in order to meet demand for redemptions.
Gradually, the funds began re-opening and trading again but the incident served to highlight the liquidity issues surrounding these types of funds.
The suspensions also caught the attention of the Financial Conduct Authority (FCA), which issued the findings of its review into open-ended property funds in July this year.
The regulator’s key findings were: “In general, authorised fund managers (AFMs) did not adequately plan, or have clear policies and procedures, for valuing their property portfolios under stressed market conditions.
“Some AFMs did not adequately consider the implications of their distribution model in their liquidity monitoring and management of funds.
“AFMs could improve their communications to platform providers, to enable platforms to communicate more effectively in turn with advisers and end-customers.”
But the FCA did acknowledge the use of suspensions, deferrals and other liquidity management tools “were effective in preventing market uncertainty from escalating further” following the Brexit vote in June 2016.
As the FCA revealed, UK-domiciled open-ended authorised funds have approximately £35bn invested in UK commercial real estate, so the implications should a similar situation arise again are potentially significant.
Diversification benefits
All of which begs the question, does this make commercial property funds unsuitable for a retirement portfolio?
There are certainly some diversification and income benefits of an open-ended property fund which in the past has appealed to those preparing for retirement.
Alex Moore, research analyst at Rathbones, notes: “Open-ended property funds can provide diversification benefits in a portfolio due to their historical low correlation to equities.
“For a long-term investor, open-ended funds provide exposure to the asset class without the gyrations of stockmarket price movements that a property share or Reit [real estate investment trust] can experience.”
It is also useful to consider how commercial property funds have recovered since the numerous suspensions last summer.
Guy Glover is manager of the F&C UK Property fund – a daily-dealing UK property fund that did not close post-referendum.
He explains: “Actually apart from a few funds which suffered from short-term liquidity issues, commercial property at an asset level has been remarkably resilient over the past 12 months, delivering an income return of above 5 per cent.”
In addition, he observes capital values - which dipped by a “modest” 2.8 per cent - have bounced back to recover the lost ground, with values up 2.6 per cent.
