Home What property funds freeze means for investors
March 21, 2020
Investors are seeking answers from UK property funds after at least seven halted trading amid a coronavirus-driven sell-off in the property market, trapping at least £12.7bn of investor money.
St James’s Place joined other asset managers this week when it suspended dealings in its UK commercial property funds, citing “material uncertainty”, or the inability to provide accurate and reliable prices for the fund’s underlying assets.
Investors are now barred from pulling their money out of the £1.2bn SJP Property Unit Trust, the £200m Property Life fund, and the £1.2bn Property Pension fund.
“We’re in a situation of a great unknown,” said Chris Ralph, chief global strategist at wealth manager SJP. “We are in a position where we are unable to price the fund in a way that we would ordinarily be able to do . . . and that leaves us with no alternative.”
The move was mirrored by other asset managers due to uncertainty about valuations in the fluctuating market, as health precautions to prevent the spread of coronavirus mean valuation agencies are unable to visit investment properties and fear continues to drive investor behaviour.
Aviva Investors’ £461m fund paused on Wednesday. Other frozen funds include Standard Life Aberdeen’s £1.7bn and £1.1bn UK property funds, as well as a £550m global property fund.
Columbia Threadneedle, Legal & General and BMO Global Asset Management also paused their £1.1bn, £2.9bn and £510m vehicles. Kames Capital and Janus Henderson suspended their property funds earlier this week.
Paul Richards, managing director of the Association of Real Estate Funds, said: “Investing in UK property is an investment in hotels, offices, shops, warehouses and restaurants up and down the country. Covid-19 is causing great economic uncertainty, hitting all of these businesses, and . . . valuers can no longer assess the value of properties with a high degree of certainty.”
He added: “Under these conditions property funds need to suspend while this extraordinary situation lasts, in order to ensure that investors, mostly long-term pension savers, are protected.”
Property funds are likely to be hit by the coronavirus in different ways, analysts say. Holdings in hotels, leisure and retail properties might expect to bear more of the burden of the virus’s economic impact than commercial or residential investments.
Investors will now have no choice but to sit tight in their property fund investments during a very uncertain time for the global economy.
“They just want answers,” said SJP partner Carla Brown, describing clients calling to discuss the property fund freeze, but also the wider market uncertainty. “The question we get asked most is ‘when are things going to change?’ and we can’t answer that.”
She added: “We tell them these actions are taken to protect the fund and also to protect their investments. By gating the fund and suspending dealing, it protects the funds that are in there.”
UK property funds have been hit by significant outflows over the past year, creating liquidity risk challenges for asset managers. In December, M&G suspended its £2.3bn fund after it was unable to sell properties to keep pace with a surge of investor redemptions.
The M&G fund remains suspended. Including this fund, total investor assets trapped in UK property funds stand at £12.7bn.
Property funds have been forced to pause trading on previous occasions. In 2016 market uncertainty and liquidity concerns caused open-ended property funds to suspend withdrawals to avoid becoming forced sellers of their illiquid assets as people raced to redeem their investments.
But the issue being cited by the funds this week is not outflows, but the inability to accurately assess the value of their holdings.
Rules set by the Financial Conduct Authority require property fund managers to consider suspending funds during times of extreme market volatility, to avoid risking a “fire sale” of the assets, which can be highly illiquid.
From September, funds will be required to stop trading if more than 20 per cent of their portfolio cannot be assessed accurately.