Property funds risk suspensions within weeks, warns Fitch

Cash levels were ‘marginally’ higher it said, and the Financial Conduct Authority (FCA) earlier this month stepped up its monitoring after £336 million in client funds were pulled in the last quarter of 2018.

But the level of preparations remains inadequate relative to the sharp downturn in sector sentiment it expects, however.

‘We believe there is potential for market reaction to Brexit developments to be more severe than the reaction to the referendum result, particularly if there is a no-deal Brexit,’ said Fitch senior director for funds Alastair Sewell.

‘Funds are unlikely to be able to meet a potential surge in redemptions by selling assets, given the illiquidity of commercial property. Initially, funds with weaker liquidity would be more likely to have to implement a gate, but gating of one fund could spark contagion to other funds if it disrupts market confidence.’

Fitch does not offer ratings on any property funds, but the company would be likely to downgrade related UK mandates, he added.  

While commercial real estate on the whole has remained well bid there have been signs of distress in retail as the long-term erosion of the UK high street has encouraged much more aggressive rent negotiations by tenants.

Shopping centre owner Intu (INTUP) wrote down its portfolio by £1.4 billion or more than 13% last year, leaving the company grappling to manage down its borrowing as its ratio of debt-to-assets hit 53%. It promised to raise cash by selling some of its sites but noted that the market remained ‘challenging’.  

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Investor gloom was evident in Intu shares’ discount to net asset value rising to an ‘unprecedented’ 64%, following the collapse of two separate bids for the company in 2018.

Columbia Threadneedle’s £1.5 billion UK Property Authorised Investment funds and Kames Capital’s £711 million Property Income funds both moved to ‘bid’ pricing in December with investors shouldering a 6% hit as the groups sought to stem mounting withdrawals.

Janus Henderson, whose £2.7 billion UK Property PAIF funds have been priced on a ‘bid’ basis since last summer, is moving to a new pricing structure next month in a bid to avoid these pricing swings.

Rule changes proposed by the regulator last year mean funds investing in illiquid assets such as property and infrastructure would have to close much faster in times of market stress.

Funds currently close when the manager judges the market to be pricing in material discounts.

The FCA proposed that funds now suspend dealing when there is ‘material uncertainty’, as expressed by an independent valuer, about the valuation of at least 20% of the fund’s assets.



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