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Property fund restrictions following an increase in redemptions


By: Graham Walker Date: 13 July 2016
Category: Lovewell Blake Financial Planning
Department: Financial planning

Three large property fund managers within the UK have announced suspended trading on their property funds due to, ‘exceptional market circumstances’.

The decisions follow an increase in redemption requests as a result of uncertainty for the UK commercial property market following the EU referendum result. The suspensions have been put in place to protect the interests of its investors and to avoid compromising investment returns.

These funds have seen their values go down by up to 5% after the Brexit result, impacting valuations for UK commercial property.

The problem that property funds face is that it can take time to sell commercial property to meet withdrawal demands, and the cash savings built up by the managers have been eroded by recent withdrawal requests in the run-up to the referendum and in its aftermath.

By their very nature, property funds have liquidity issues: investors have the ability to withdraw cash every day, but it can take months for the fund to sell the underlying properties. In order to safeguard against this, portfolios tend to have a high cash weighting but these can get eaten into during periods of high and constant redemption requests.

The suspensions are the first to be seen in the UK commercial property market since the financial crisis in 2007/2009,
when heavy losses, and concerns over the economic outlook, sparked a wave of redemptions from the sector.

Investor interests can be protected in a number of ways with the ability to suspend redemptions being one of the most important. This prevents fund managers from being forced into rapid selling and thus helps them achieve a better outcome for all their investors.

Andrew Bailey chief executive of the FCA has said, “We have got open-ended funds that hold illiquid assets. Suspension is designed into these structures – it is not a panic measure”.

It remains to be seen whether other fund groups will follow in suspending their property funds but some suspect this could be likely.

The problem is that news headlines generate fear and this has a knock-on effect with investors and within the market. Investors see suspensions and look to sell their positions. This creates a domino effect, if fund managers see big redemptions in their funds they are going to suspend trading.

The uncertainty around Brexit is undoubtedly a challenge for the property sector, but we believe this is not a repeat of the financial crisis when the whole financial system faced turmoil.

The Bank of England has set out its readiness to provide liquidity and protect interest rates.

Money is still likely to come out of the property sector as a short-term reaction. It must also be kept in mind that accurately valuing UK property will be a lot more difficult until more clarity emerges over the UK's exit of the EU.

Since the vote, the UK economy has been downgraded and GDP forecasts have been lowered. We emphasise that long-term investors in property, should not change their investments and should not be panicked into selling. Property remains a good diversifier as part of any investment strategy, which should bring comfort to long-term investors.

If you have any concerns or queries where your investments are concerned, please do call or email your usual contact at Lovewell Blake.

Lovewell Blake Financial Planning Limited is a firm of independent financial advisers authorised and regulated by the Financial Conduct Authority.
 
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