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Property funds halt trading as Brexit contagion spreads Property funds halt trading as Brexit fallout deepens
(35 minutes later)
Two more commercial property funds have stopped investors from withdrawing their cash, escalating fears about the impact of the Brexit vote on the UK economy. The fallout from the Brexit vote reverberated through the markets on Tuesday as two more City property funds barred investors from withdrawing their cash and the Bank of England warned that risks to the financial system had begun to “crystallise”.
Related: Brexit crisis: Aviva suspends property trust as Mark Carney warns of 'crystallising' risks - business live City watchers warned that further property funds would be forced to bar withdrawals as investors race for the door amid fears of a plunge in the values of office blocks and shopping centres in post Brexit Britain.
M&G, the fund management arm of insurer Prudential, suspended its £4.4bn fund on Tuesday afternoon, citing an increase in redemptions since the referendum. The move came hours after Aviva Investors blamed “extraordinary market circumstances” for its decision to halt withdrawals by investors in a £1.8bn fund, which suffered a surge in requests by backers to redeem their investments because of fears of a property crash after Britain voted to leave the EU. Related: Commercial property fund freeze – all you need to know
Their decisions came 24 hours after Standard Life blocked investors from taking cash out of its £2.9bn commercial property fund. The suspensions came on another day of drama on the financial markets, 11 days after the vote to leave the EU wrong-footed investors and sparked political turmoil. Developments included:
The suspensions came on another day of drama on the financial markets, 11 days after the vote to leave the EU wrong-footed markets and sparked political turmoil. Among developments: • The pound plunging to a new 31-year low against the dollar, falling 2% to $1.30 at one point.
• The pound plunged to a new 31-year low against the dollar, falling 1.8 cents to $1.3090. • A closely watched survey of the services sector coming in worse than expected, indicating a sharp slowdown in the wider economy.
• A closely watched survey of the services sector showed a worse-than-expected reading of 52.3 in June, down from 53.5 in May. A reading above 50 indicates growth. • The Bank of England easing regulations on banks to allow them to release up to £150bn worth of loans to households and businesses.
• The Bank of England warned that the economic risks caused by the referendum had “begun to crystallise” as it eased regulations on banks to allow them to release up to £150bn of loans to households and businesses. • Chancellor George Osborne held a summit with the heads of the major high street banks, who pledged to avoid a new credit crisis by making loans available.
• The chancellor, George Osborne, held a summit with the heads of the major lenders who pledged to avoid a new credit crisis by making loans available. The property funds barring withdrawals included M&G Investments, which runs a £4.4bn property fund, and Aviva Investments, whose fund has assets worth £1.8bn.
A spokesman for Aviva Investors said: “The extraordinary market circumstances, which are impacting the wider industry, have resulted in a lack of immediate liquidity in the Aviva Investors Property Trust. Consequently, we have acted to safeguard the interests of all our investors by suspending dealing in the fund with immediate effect.” The moves came one day after Standard Life banned its clients from doing the same on its £2.9bn property fund, with the firms saying they had acted to stop a rush of withdrawals following “extraordinary market circumstances”.
Aviva said the suspension would give the fund time to sell assets to remain liquid and meet obligations to investors seeking to redeem their holdings. Investors have been buying into commercial property funds to try to benefit from the 40% rise in commercial property prices since the 2009 crisis. But concerns that the market may have peaked before the referendum – plus fears on the impact of the Brexit vote on the UK economy – has triggered nervy investors to ask for their cash back.
Related: Standard Life shuts property fund amid rush of Brexit withdrawals Large-scale outflows cause problems for commercial property funds because they are based on assets that are difficult to sell quickly when investors want their money back. Restrictions on withdrawals are then put in place to give fund managers time to sell their properties. Otherwise, they would be forced to sell assets at fire-sale prices to fund the redemption requests. That would drive down the fund’s value, encouraging more investors to cash out, creating a vicious circle.
While the Bank of England was stressing that markets were functioning well in the wake of the referendum result, the focus has turned on to the commercial property sector following the move by Standard Life to close its commercial property fund on Monday. That was thought to be the first such move since the financial crisis, and has prompted concerns that more funds could be forced to prevent investors withdrawing their cash. The Bank of England said in its half-yearly assessment of risks to the financial system published on Tuesday said that some of the risks to the financial system it had warned about in the run-up to the referendum had “begun to crystallise”, including the possible downturn in the commercial real estate market.
Funds investing in property have been popular with investors looking for better returns than cash or bonds. But with fears of a post-Brexit recession mounting investors are concerned that the value of office blocks, retail parks and factories could plunge. Around £35bn – or 7% of the total investment in UK commercial property – is invested in commercial property funds, which offer private investors a chance to gain exposure to huge office block developments and shopping centres. M&G’s fund has invested in properties including New Square Park, a 250-acre office park near Heathrow airport, and the eight-storey 3 Hardman Square office block in Manchester; while Aviva holds sites including 20 Soho Square development in central London and the Guildhall shopping centre in Exeter.
There were signs of strain for the funds last week when Standard Life and rivals Henderson, Aberdeen and M&G reduced the amount investors cashing in holdings would get back by up to 5%. Following Standard Life’s suspension of its fund, shares of property companies and fund managers fell heavily on Tuesday. Andrew Bailey, the newly installed chief executive of the Financial Conduct Authority, the City watchdog, said the current situation “points to issues that we need to look at in the design of these things” and insisted there was no cause for panic.
Laith Khalaf, an analyst at Hargreaves Lansdown, said: “The dominos are starting to fall in the UK commercial property market, as yet another fund locks its doors on the back of outflows precipitated by the Brexit vote. It’s probably only a matter of time before we see other funds follow suit.” Bailey’s comments came as City commentators queued up to warn of further woe for the commercial property sector – and predict that other funds would be compelled to temporarily prevent withdrawals.
On Wednesday morning, the Bank of England governor, Mark Carney, had used his twice-yearly assessment of risks to the financial system to warn that “adjustments in commercial real estate could tighten credit conditions for UK business”. Simon French, chief economist at stockbroker Panmure Gordon, said: “Commercial real estate looked very vulnerable as we entered the referendum with most finance directors thinking the stuff was overpriced before Brexit. Add that to the fact that material changes to immigration and market access will affect prime office space occupants and a financial sector most correlated to GDP slowdown, then this looks like a perfect storm.”
Flows of foreign investment into commercial property had fallen 50% in the first quarter of the year, he said. Laith Khalaf, senior analyst at financial firm Hargreaves Lansdown, added that banning investors from redemptions could happen to any of the funds. “We have now had two in very short succession. It suggests that we are on the cusp of others.”
He added: “The number of vulnerable households could increase due to a tougher economic outlook and a potential tightening of credit conditions. In particular there is growing evidence that uncertainty about the referendum has delayed major economic decisions, such as business investment, construction and housing market activity.” Khalaf added that around 10% of a fund’s asset value tends to be held in cash and that funds selling off their assets would inevitably put pressure on commercial property prices across the UK.
But, he said, the Bank was taking steps to ensure credit could keep flowing to businesses and households by relaxing the amount of capital banks needed to hold. Unlike in 2008, banks could be part of the solution, not the problem, Carney said. However, Bailey called for calm and said that the suspension of the funds should not been seen as a panic measure. “It’s designed into these structures to deal precisely with that situation where there’s been some shock to the market, if you like, and there’s a presumption of a valuation adjustment which is quite hard to capture in illiquid assets at high frequency,” he said. “And the purpose of the suspension is to create a pause, if you like, to allow that process then to happen. And that’s sensible, it’s absolutely sensible.”
Meanwhile, Osborne issued a joint statement with the heads of the major lenders, in which they said they would make lending available. Other analysts played down fears of a rerun of the 2009 crisis when commercial property prices plunged and banks were left nursing heavy losses on their loans.
“While we are realistic about the economic challenge facing the country after the referendum result, we are reassured that collectively we can rise to it. The last time Britain faced an economic shock the banks were at the heart of the problem. Thanks to the hard work of rebuilding the banks, making them stronger and safer, and the arrival of new challenger banks – banks and building societies are now part of the solution,” the banks and the chancellor said. Eduardo Gorab, a property economist at Capital Economics, said: “Clearly, the uncertainty kicked up by the referendum’s result has had an adverse impact on sentiment, which has been driving outflows over the last week or two.
“However, if we are right in thinking that occupier and investment markets are well placed to weather the uncertainty, we suspect that fears of a repeat of 2009 are overdone.”
The Bank of England has already subjected banks to tests to ensure they can sustain a 30% fall in commercial property prices and will impose tests on them again this year.
However, the Bank said that there could be wider fallout from declines in commercial property prices. This is because 75% of small business loans are secured against property while banks also use such loans to count towards their capital buffers.
In its biannual assessment of financial risks, the Bank said it was “focused on the potential for adjustments in the commercial real estate market to be amplified and affect economic activity by reducing the ability of companies that use commercial real estate as collateral to access finance. Any adjustment could potentially be amplified by the behaviour of leveraged investors and investors in open-ended funds.”
Around 45% of commercial property is funded by foreign investment although there has been a 50% reduction in such investment in the first quarter of the year, the Bank of England said.
Although there is no technical link between commercial property prices and residential property, house market experts have warned that Britain’s decision to leave the EU will affect demand and valuations for residential property in the coming months. Foxtons, the London-focused estate agent, issued a profit warning in the wake of the EU poll as it predicted that the capital’s property market will remain depressed for the rest of the year.