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Market mayhem prompts property funds to suspend trading

By Polly Warrack
18 March 2020

By Polly Warrack

Following increasing levels of intervention by the UK government to prevent the spread of Covid-19, eight property funds have now suspended trading in a chain of events that will remind many of the weeks following the EU referendum in 2016. Including the M&G fund that has remained suspended since December, there is now upwards of £10.7 billion of investor money held in the vehicles writes Newgate Associate Partner, Polly Warrack

Standard Life Aberdeen, Columbia Threadneedle, Legal & General, BMO Global Asset Management, Aviva Investors, Kames Capital and Janus Henderson all halted trading as independent valuers found themselves unable to provide a reliable or accurate valuation for assets that are no longer being used by significant members of the public. As John Forbes, an independent property consultant has written, “what is the value of a pub, a hotel or retail premises if you can’t use it? What’s the valuation of an office if no one can get into it?”

Why has this happened? Financial Conduct Authority rules require property fund managers to consider suspending funds during extreme market conditions, allowing them to sell assets without risking a “fire sale” and a rule that will grow more rigorous in its use from September when property funds will have to halt trading, if there is material uncertainty over the value of more than 20 per cent of their portfolios.

This will once again pose questions about whether open-ended retail funds are an appropriate structure for investing in property as an asset class. Even a fast-paced property sale can take months, meaning that significant outflows, such as the ones experienced this week or in 2016, create liquidity problems for asset managers. Put simply, if demand for redemptions outstrips supply of cash available then managers must either sell assets at an inopportune time or suspend trading as we have now witnessed more than once.

What happens next? In 2016, the funds re-opened once the tumultuous period of uncertainty calmed down in the months following the referendum. For now, we must simply wait to see how investors and fund managers respond to rapidly changing events and understand that there is yet more uncertainty to come.