£ 5bn UK property funds remain on hold despite clarity of valuations


A total of £ 5.2bn of UK direct property funds remain on hold without a date set for their reopening despite the lifting of valuation uncertainty clauses which came into effect amid the first wave of the pandemic. coronavirus.

In March, in the midst of the Covid-19 lockdown, the Royal Institute of Chartered Surveyors (Rics) introduced material uncertainty clauses on their independent assessments, prompting funds to suspend in accordance with looming Financial Conduct Authority rules. The rules, which officially came into effect in September, require funds to be closed when there is significant uncertainty about valuations on at least 20% of the portfolio.

But Rics lifted these clauses in virtually all real estate sectors in September and a number of funds in the Investment Association UK Direct Property sector remain on hold. About half of the total assets under management currently trapped, £ 2.7bn, are in funds with similar liquidity levels to their industry peers that have already reopened.

See also: How will UK property fund pricing react now that valuation uncertainty has been lifted?

UK property funds still on hold

This month, Janus Henderson told Property Paif UK investors in an update that he “may not be able to reopen until the first quarter of 2021”. Its cash levels are 20%, according to its latest fact sheet.

He said this was “because of the need to further increase liquidity to cope with known fund redemptions and to have sufficient liquidity to significantly reduce the risk of resuspension in the short term.”

The Aegon Property Income fund also confirmed Portfolio advisor that it would be unlikely to reopen this year, although due to a number of buyouts just before the suspension it has a cash position of just 7.5%, the lowest in the IA sector, according to FE Fundinfo.

Aegon Asset Management spokesperson said: “The ensuing market conditions have been extremely difficult for real estate sales and we want to ensure that we are hitting the right price for the benefit of all investors in the fund, including those who wish to redeem and those who wish to remain invested. . “

It is targeting 20% ​​cash plus additional refunds before it reopens, a spokesperson said.

Aviva Investors UK Property and BMO UK Property funds also remain on hold with cash positions of 21.5% and 23.8% respectively, according to their September factsheets. Neither would confirm Portfolio advisor if they were likely to reopen before the end of the year.

See also: FCA Notice Period Proposals Could Spell the ‘End’ for Commercial Real Estate Funds

How did the flow of funds come back on a daily basis?

Fairview Investing consultant Ben Yearsley notes that many funds that remain closed have similar cash levels to those that reopen.

Threadneedle UK Property Paif had 19.8% cash at the end of August, several weeks before lifting its suspension on September 17, the first in the IA UK Direct Property sector to do so. It faced buybacks of £ 68million for the remainder of the month, or around 7% of assets at reopening, according to Morningstar data.

Cash weightings of suspended funds in the IA UK Direct Property sector

Funds AT M Cash levels
BMO UK owned £ 480.2 million 23.8%
Aviva Investors UK Real Estate £ 393.1 million 21.5%
Janus Henderson United Kingdom Property Paif £ 1.8 billion 20%
M&G real estate portfolio £ 2.1 billion 10.1%
Aegon Property Income £ 426 million 7.5%
Source: FE Fundinfo

There are no flow figures yet for LGIM UK Property Fund and Canlife UK Property Fund, which had the highest cash reserves in the industry, at 29.3% and 29.8% respectively, and all two returned to daily transactions this month. Michael White, UK real estate manager at Canada Life Asset Management, said flows have been “manageable” since the fund removed its 185-day notice period, which was introduced in response to the clause. significant uncertainty.

The Standard Life Investments UK Real Estate fund and the Aberdeen UK Property fund have cash weights of 22.3% and 25%, according to their September factsheets, and are expected to reopen on November 16.

See also: Real estate funds could lose Isa eligibility as FCA considers 180-day notice period

What DFMs expect from UK property fund managers

Yearsley believes that funds with more than 20% cash should be able to reopen “unless you know for sure that more than 20% are waiting to come out.”

“I prefer that a fund opens and closes because at least you have given investors, who want to exit immediately, the opportunity to do so.

He says some of the funds that remain on hold may wait to see how the flows play out among their reopened peers.

“It’s different if you don’t have money, but for those with similar money levels, like Janus Henderson, I think they’re waiting to see how much Legal & General will lose in the first month. I’m sure it’s not their official position, but I’m sure it’s at the back of their mind.

Janus Henderson referred Portfolio advisor to the suspension of funds update on his website when asked if he is monitoring flows to competing funds.

Tilney currently owns the LGIM UK Property, Janus Henderson UK Property and SLI UK Real Estate funds.

“We know these managers very well and have invested with them for the long term, so while many people may be frustrated with the time it takes to reopen these funds, it is important that it is done correctly and with care – that’s exactly what these managers do, ”says Ben Seager-Scott, multi-asset manager.

GDIM investment manager Tom Sparke believes investors should feel “very strongly about the industry for coming back into these investments.” “It’s a very difficult situation, but I think allowing investors to decide whether to take a significantly reduced market value, but keeping the funds open would be my preferred route, as it gives the unitholder the choice. “

Funds that choose to remain closed should lower their management fees, Yearsley said.

The Aegon Property Income fund cuts its fees by 0.15 percentage point to 0.60% from the beginning of November until its suspension is lifted. The M&G real estate portfolio, which was suspended in December 2019 due to liquidity, reduced its fees by 30% during the period.

Janus Henderson said full fees will continue to be billed as usual, saying the fund continues to be actively managed.

Portfolio advisor asked all other suspended funds for clarification as to whether they would reduce the fees, but none provided a response.

Also read: Reopening of BMO Real Estate Fund Raises Questions About the Scarcity of Hybrid Models

What ACDs take into account when deciding when to reopen funds

JB Beckett is convinced that the decision to reopen, which rests with the authorized directors of companies (ACD), would have been objective “alas, that does not mean that there will not be no missteps along the way”.

Becket says ACDs have a lot more to think about than cash cushions, also highlighting market health, latest portfolio stock valuations minus uncertainty discounts, any in-transit trade flows, investor mix, the size of the fund, the valuators used, the FCA and Rics guidelines in force, the current cancellation rates, leasing restructurings, etc.

White claims that the lifting of the Canlife UK Property fund’s deferral period was primarily based on removing the material uncertainty clause and the fund having a good cash balance. “We will examine whether liquidity has fallen below 10% and whether the outlook for the market remains uncertain,” he said.

A spokesperson for Columbia Threadneedle said it was “important that we put the needs of our customers first.”

“Prior to the reopening, the fund had continued its strategic selling program allowing liquidity to accumulate above the upper level of the liquidity corridor by selling properties in accordance with the fund’s investment strategy. This allowed the fund to deal with a potential surge in short-term exits after reopening. The fund remains “comfortably” within its target liquidity range of 5-15%, the spokesperson said.

Square Mile’s senior investment consultant Jake Moeller says there is a “considerable” possibility that funds that have reopened will have to be put on hold again soon.

“I suspect that any cash buffer will run out quickly, but the liquidity profiles differ from fund to fund,” Moeller said. “There are various sector and regional exposures to consider, different rental profiles, default rates and lot sizes. “

The main consideration should be to avoid selling assets at discounted sale prices, he says. “It doesn’t serve the best interests of any investor. Funds that have a significant concern about it will be less inclined to open until they feel there is a more orderly dynamic. “

Royal London said it could not guarantee the restrictions would not be reintroduced on its RLP Property fund after removing them on September 29. “It all depends on how the UK continues to emerge from lockdown as the economy reopens and how any emerging secondary epidemics are contained,” the fund group said on its website.

See also: UK property funds maintain office allocations as companies warn of coronavirus overhaul


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