Large UK property funds are keeping trading suspensions in place because of fears that low cash buffers and regulatory uncertainty could trigger an investor run.
All of the UK’s major commercial property funds suspended trading in March, trapping close to £22bn of investor money, after the coronavirus-induced halt in economic activity made it difficult to value real estate.
Yet while three investment managers — St James’s Place, Columbia Threadneedle and most recently L&G — have announced they will reopen their property funds, most others remain suspended as groups weigh whether they will be able to cope with redemption requests on reopening.
A chief concern is that UK regulatory proposals, which are designed to prevent fund liquidity mismatches by introducing longer redemption notice periods, could have the opposite effect by encouraging investors to withdraw en masse before the rules come into force.
This risk, which could ultimately lead funds to suspend again, is compounded by the low cash balances of some property funds. Aegon Asset Management’s fund holds cash equivalent to 7.3 per cent of its portfolio, while M&G’s holds 8.2 per cent. This compares to 24.4 per cent and 18.5 per cent held by L&G and Columbia Threadneedle’s funds respectively.
“Property managers will be fearful that just when they are ready to reopen they lurch straight into another crisis brought about by the potential rule change,” said Ryan Hughes, head of active portfolios at AJ Bell. He warned an investor exodus could lead to a “liquidity death spiral” as managers try to sell assets in an uncertain market.
One property fund manager who asked not to be named said: “The FCA proposals seriously bring into doubt whether people will want to remain invested.” Resolving outstanding questions surrounding the rules was “vital to the ongoing health of property funds”, the manager added.
John Forbes, an adviser to property fund managers, said that one of the main issues was whether property funds would continue to be eligible to be held through Individual Savings Accounts (ISAs) or Self-invested Personal Pensions (SIPPs) tax wrappers following the reforms.
The FCA acknowledged this was an issue in its August consultation paper but is yet to propose a solution. The regulator told the Financial Times: “We appreciate that ISA eligibility is an important consideration for retail investors, and will take this into account in our final decisions.”
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But Mr Forbes said the FCA’s statement did not go far enough. He urged the regulator to “make it clear that there will be no instant implementation of new rules” and that it intended to find solutions to the current sticking points before going ahead.
Aegon portfolio manager Richard Peacock said uncertainty around the reforms, combined with other redemption risk issues, were factors affecting whether his fund would reopen. “For this reason we are engaging with all our investors to discuss the outlook and their intentions,” he said.
Canada Life said it expected its fund to be reopened after its month-end valuation date. Standard Life Aberdeen and BMO said they would continue their suspensions and reconsider at month end. Janus Henderson, M&G and Aviva Investors said they would focus on raising liquidity to meet potential outflows.
The FCA said it expected managers to conduct “as much due diligence as possible” to ensure they have enough cash to fulfil redemptions on reopening.