08 Jul Property Fund Update
Despite the positivity displayed by recent FTSE 100 movements, the repercussions of the Brexit vote gathered speed this week as Standard Life Investments announced a suspension of their UK Real Estate Fund. This move was quickly followed by a slew of others including Aviva, Columbia Threadneedle, Canada Life, Aberdeen and our own M&G and Henderson property funds.
UK Commercial property has come under pressure since the Brexit vote and indeed since the turn of the year, as prices had been driven upwards and uncertainty surrounding the vote weighed on the asset class. In order to manage redemptions from their funds, commercial property managers must hold a proportion of the fund in cash or readily realisable assets, however, in times of extreme uncertainty they may receive more redemption requests than usual, which means they do not have sufficient funds available to satisfy the requests. This can only then lead to selling down properties, which is unlikely to be in the interests of longer term investors as they sell at “fire sale” prices, nor is it a quick process and one that in the current environment is likely to take longer than usual.
The ability to suspend the fund therefore is an important safety feature and offers protection for longer term investors who wish to remain in the fund. Indeed some have argued, including regulators and the Bank of England, that as an asset class, property is not ideally suited to the open ended fund environment, as it is a long term illiquid investment that cannot fall into the daily liquidity regime of such funds.
Fund suspensions will inevitably lead some to draw comparisons to 2007, when a number of hedge funds and property funds were also suspended. However, it is important to stress that there are differences. Some of the underlying properties will have undoubtedly fallen in value but they are still of decent quality, in prime locations and in the short term will be able to be sold. This is backed up by high occupancy levels which will help to avoid large falls in value. The properties are not bundles of sub prime mortgages that were difficult value, but will have a realisable value and often with long term financially strong tenants occupying them. Additionally, property funds do not currently hold the high levels of debt held during the financial crisis, which means that properties will not have to be sold to satisfy that debt.
We always take a view of limiting exposure to any fund or asset class specifically to protect against this type of unexpected event. Across our portfolios we hold a maximum of 10%, split across the two affected funds. Although this does unfortunately mean we are unable to access the money held in these two funds.
However, we are focussed upon the long term and believe that property allocation does play a large part in diversifying our portfolios, not to mention the fact that the yield received from the property funds is a useful component of overall portfolio return.
The outlook for commercial property does remain uncertain and it is intrinsically linked to the success of London as an international financial centre, although that has been called into question recently. However, it is also linked to the overall strength and stability of the regions and both the Treasury and the Bank of England have suggested they are well placed to deal with ongoing uncertainty in this respect.
With Sterling now at 31 year lows against the US Dollar, it may be that the weaker currency, in time, helps to attract foreign buyers who are able to obtain significant discounts purely on the basis of currency movements.
With those points in mind we will continue to monitor the situation with both of our preferred funds and the wider market in general, taking action when we are able. Withdrawals from portfolios both single and regular will simply be taken from the remaining funds proportionately and equally any planned regular or one off investments will be invested across the non property funds. This will of course mean that portfolios may be slightly out of kilter from our recommended asset allocation, however, we will rebalance portfolios as soon as we are able.
If you have any questions, please do not hesitate to contact your Adviser.