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Property fund turmoil continues as two more firms reveal cut in value Property fund turmoil continues as three more firms cut value
(about 7 hours later)
Turmoil in the property sector is continuing, with two more funds announcing revaluations that show a sharp fall in the price of shopping centres, office blocks and warehouses since the EU referendum. Shopping centres, office blocks and warehouses worth up to £5bn could be put up for sale as the turmoil in the UK commercial property sector prompted by the Brexit vote forces fund managers to revalue their portfolios or temporarily prevent investors withdrawing their savings.
With the pound remaining under pressure on the foreign exchange markets, Legal & General and Foreign & Colonial became the latest fund managers to take action on Thursday to reflect falling prices for property following the 23 June vote. With the pound under pressure on the foreign exchange markets, fund managers Legal & General, Foreign & Colonial and Dutch-owned Kames cut the value of their property funds on Thursday. L&G cut the value of its £2.3bn fund by 10% following a 5% cut last week while F&C and Kanes both cut by 5%.
One of the factors weighing on sentiment is uncertainty about the role of London as a financial centre outside the EU. George Osborne, the chancellor, met the heads of major international banks including Goldman Sachs and Morgan Stanley on Thursday to discuss ways to keep the City as a major trading centre. The moves followed Aberdeen Fund Management, which on Wednesday announced it was halting trading in its property fund for 24 hours and devaluing it by 17% - thought to be the biggest adjustment ever made by a property fund . Aberdeen has since extended the trading ban until Monday.
L&G cut the value of its £2.3bn property fund by 10% following a 5% cut last week while Foreign & Colonial cut the value of its £290m fund by 5%. Others have suspend dealings for longer, starting with Standard Life’s decision on Monday to halt trading in its £2.9bn commercial property fund, leading to a cascade effect with Aviva, Prudential’s M&G, Henderson, Columbia Threadneedle and Canada Life following suit taking the total value of property funds suspended to £18bn.
Mike Prew, equity analyst at Jefferies, said buildings could be sold to find the cash to repay investors in the funds: “We estimate that £3bn to £5bn of assets could be put up for sale but it’s a trading vacuum and what sells is likely to get a hefty Brexit discount.
“Buildings are now being readied for sale but keys to cash can typically take three to six months.”
Related: London commercial market will be hit by Brexit, says property groupRelated: London commercial market will be hit by Brexit, says property group
“At this time it is still difficult to predict the exact impact of the vote to leave and subsequent market events on commercial property values. In the interests of treating customers fairly, we have made a further fair value adjustment of -10%, so that the underlying property assets of the UK property fund (PAIF) and the UK property feeder fund are now subject to a total fair value adjustment of -15%,” Legal & General said. One of the factors weighing on sentiment is uncertainty about the role of London as a financial centre outside the EU. George Osborne, the chancellor, met the heads of major international banks including Goldman Sachs and Morgan Stanley on Thursday to discuss ways to keep the City as a major trading centre. “We are determined to work together,” they said in a joint statement,
F&C said: “We have been closely monitoring fund flows and our ability to obtain accurate property valuations The prices at which investors are able to buy or sell shares have decreased by approximately 5%.” Ratings agency Fitch cited “deterioration in market confidence for London City offices following the UK vote to leave the EU”, as it downgraded a complex bond known as Ulysses secured against the City Point skyscraper building in the City.
Neither of the fund managers went as far as rivals to suspend dealings, which started on Monday when Standard Life halted trading in its £2.9bn commercial property fund after being swamped by investors trying to cash in. Aviva and Prudential’s M&G quickly followed along with Henderson, Columbia Threadneedle and Canada Life. The property fund sector has been a focus since the Brexit vote and was highlighted in the Bank of England’s assessment of risks to markets, published on Tuesday. Threadneedle Street cited these open-ended commercial property funds which offer almost instant access to cash as having the potential to exacerbate problems in the market.
Aberdeen Fund Management on Wednesday announced it was revaluing its fund by 17% and would stop trading for 24 hours but it has since extended the ban until Monday. The turmoil has coincided with pressure on the pound, which has been trading at 31-year lows and on Thursday remained below $1.30 well off the $1.50 it reached when the polls closed on 23 June .
The property fund sector has become a focus for investor anxiety since the Brexit vote and was highlighted in the Bank of England’s half-yearly assessment of risks to financial markets, published on Tuesday. At the time, the Bank said: “Any adjustment in commercial real estate markets could be amplified by the behaviour of leveraged investors and investors in open-ended commercial property funds.” However, the London stock market has steadied, with the FTSE 100 gaining more than 1% to 6,533 and the FTSE 250 regarded as a better barometer for the UK economy and at one point off this week 10% since the referendum rallying by 1% on Thursday to 15,898.
These open-ended funds intended to allow access to cash – are now effectively closed, said Jason Hollands, managing director of Tilney Bestinvest. Yields on UK government bonds known as gilts which have halved to 0.7% since the referendum are also being watched as investors seek safe havens and brace for a cut to interest rates as soon as next Thursday. Analysts at Barclays struck a cautious note as they lowered the forecast for UK growth in 2017 to minus 0.4%. “We believe investors should position for a less benign economic and financial environment than is priced into global risk assets,” the Barclays analysts said.
“It is going to be a waiting game that will require patience, so investors in suspended open-ended funds shouldn’t expect the gates to be reopened any time soon. Dealing in funds may well be suspended for three months, possibly for the remainder of the year,” said Hollands.
He said the revaluations were pre-emptive moves at a time when there was a lack of real data about what was going on in the property market. “Actual commercial property transaction volumes could remain low for some months as deals go back to investment committees and businesses await greater line of sight on who will lead the negotiations between the UK and EU over Brexit and their opening stances,” said Hollands. Jason Hollands, managing director of Tilney Bestinvest, said: “Dealing in the property funds could be suspended, possibly, for the remainder of the year.”
Great Portland, which develops and invests in offices, retail space and housing in the West End and other parts of central London, echoed this sentiment. Toby Courtauld, Great Portland’s chief executive, said: “In the near term, we expect confidence to reduce and some business investment decisions to be deferred whilst negotiations to establish our trading arrangements with the EU are undertaken. As a result, we can expect London’s commercial property markets to weaken during this period of uncertainty.” He said the revaluations were pre-emptive moves. “Actual commercial property transaction volumes could remain low for some months as deals go back to investment committees and businesses await greater line of sight on who will lead the negotiations between the UK and EU over Brexit and their opening stances,” said Hollands.
The pound, which has been trading at 31-year lows, edged up to around $1.30 although it remains well off the $1.50 level it reached when the polls closed on 23 June amid expectations of a vote to remain in the EU. The weakness in the pound could help buoy the market as foreign investors are enticed to buy properties. Property consultancy Arcadis said its clients had reported “a bounce in inquiries” from foreign buyers who stand to save about 10% of the cost of buying a £1m property. Great Portland, which develops and invests in offices, retail space and housing in the West End and other parts of central London, echoed this sentiment, warning it expected London’s commercial property markets to weaken during the uncertainty.
Bank shares have also been hit, in part because of fears that they will suffer losses on commercial property lending. Banks have lent about £85bn for commercial property although this is down from £150bn in 2011, with foreign investors now accounting for 40% of the funding for the sector. British Land, however, announced it had sold the Oxford Street branch of Debenhams for £400m to an unnamed private investor - although it gave no details of any profit on the sale of the seven storey flagship department store building. Since the referendum, it said it had exchanged 11 long term retail leases on terms agreed prior to the vote. “British Land has entered this period of post-referendum uncertainty in a robust position,” said Chris Grigg, chief executive of British Land.