More U.K. Real Estate Funds Suspend Withdrawals

Though the Bank of England insists the suspensions aren't a 'panic measure,' investors are wondering what will be next.
By James Skinner ,

 The number of London fund managers to have suspended redemptions out of commercial property vehicles in the wake of the the U.K.'s vote to leave the European Union doubled to six late on Wednesday afternoon. Henderson Global Investors, Canada Life, and Columbia Threadneedle all announced, shortly before the market closed, that they were barring the exit doors on U.K. focused property funds.

The affected funds are UK Property Fund PAIF, Threadneedle UK Property and Canada Life's Canlife Property Life Fund, Canlife Property Pension Fund, Canlife UK Property Life Fund and Canlife UK Property Pension Fund.

All of the investment managers cited exceptional liquidity pressures amid unprecedented demands for redemptions, reflecting the fact that investors are turning sour on U.K. property in increasing numbers. Most have labelled the decision as being in the best interests of investors, given that it will prevent them from being forced into a fire-sale of assets.

On Monday and Tuesday, Aviva Investments, Standard Life and M&G Investments had suspended redemptions from property funds worth a collective £9 billion ($11.5 billion), citing excessive withdrawal requests and insufficient liquidity.

The funds in question are unit trusts and open-ended-investment-companies, or OEICs, and have become the highest profile victims of the real estate slump triggered by U.K voters' decision to leave the European Union in a referendum on June 23.

A representative for the U.K.'s Financial Conduct Authority said today that the only requirement imposed on the funds under current regulations is that they review their decision every 28 days. He highlighted that, during the financial crisis, investors had to wait "many months" before some investment managers were able to return their funds.

Unit trusts and OEICs differ from other investment vehicles in that there is no market for the trading of units, or shares in the funds. Investment trusts raise capital through issuing new shares, which then trade on public markets. But open-ended funds and unit trusts issue new shares directly to investors and the proceeds are taken and invested into the manager's portfolio. In order to exit the fund, the manager must have the necessary liquidity to buy back the relevant shares and to then cancel them.

Andrew Bailey, deputy governor at the Bank of England, said on Tuesday the funds' suspension mechanism "is not a panic measure...it is a necessary structure of the fund."

Early on Wednesday afternoon, TheStreet reported that data from TrustNet, a leading source of fund information in the U.K., placed Legal & General UK Property Fund and Henderson Global Investors UK Property PAIF on their list of most viewed funds on Wednesday, with web site user interest only slightly lower than interest in the suspended funds. Throwing up the possibility that one of those two could be next.

At the time, Henderson Global declined to comment on the level of withdrawal requests that it had experienced, but within a matter of hours it announced that it too would be suspending redemptions.

Legal & General also declined to comment on the level of redemption requests it has received. But it said, "The UK Property Fund remains well positioned in terms of liquidity and asset management... retains over 20% of its NAV in liquid assets."

The Bank of England warned on Tuesday about the risks posed to the economy by falling commercial property prices, citing its frequent use as collateral against borrowings among businesses and noting that the lower real estate prices fall, the lesser the amount of credit that businesses will be able to secure in future.

Analysts at Jefferies recently noted that the market for real estate investment trusts was pricing in a 10% to 20% decline in the value of commercial property in London. Others have predicted similar levels of trauma for U.K. property investors.

For investors in the frozen funds to get their money back, they will need peers to agree to keep their funds in the vehicles, or for the funds' managers to begin shedding property assets to raise cash. But the latter may even exacerbate the growing sense of crisis in London if the market suddenly becomes saturated with institutional sellers.

On Wednesday, the five largest real estate investment trusts with exposure to London all closed between 2.7% and 4% lower at the end of the London session. These include Land Securities (LSGOF) , Derwent London, Great Portland Estates(GPEAF) , Workspace Group and London Metric Property (LNSPF). All have lost about 30% of their value so far this year.

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