Some of the largest funds holding billions of pounds of real estate assets in the UK remain closed to investors, three months after a wave of transaction suspensions were applied at the height of the massive Covid-19 sell-off.
Fund analysts predict it could be up to six months before real estate appraisers are able to accurately assess assets and transaction restrictions can be lifted – only for funds to face up to a potential cliff-edge Brexit.
Ryan Hughes, head of active portfolios at online investment platform AJ Bell, said real estate valuations could become clearer if there is an increase in buying and selling activity as the UK is slowly starting to reopen parts of its economy.
“But valuers will want to see sustained evidence that the market is strong, and they can clearly value these assets,” Hughes said. “We are probably still a few months away from reopening the entire sector. “
Assets worth just under £ 10bn are currently stranded in the UK’s largest real estate funds.
There are bright spots. BMO Global Asset Management announced on June 14 that it had reopened its £ 490million property growth and income fund, which, along with others, was shut down in March after the global market rout made it difficult for the accurate valuation of commercial and real estate properties.
The BMO fund is, however, in a unique position: only 28% of its assets are held in physical assets, with the remainder being stocks and cash.
Real estate funds managed by Standard Life Aberdeen, Aviva Investors, L&G and Janus Henderson – all of which have larger allocations to bricks and mortar – remain on hold, according to statements given to Financial news.
M&G Investments, which froze its UK real estate fund in December due to political uncertainty over Brexit, told investors on June 16 that its suspension would remain in effect.
Hughes added that while it is possible that some real estate funds may be able to reopen before the end of the year, asset managers will act with caution as the Dec. 31 deadline approaches to strike a trade deal. on Brexit.
“We might find that the real estate market is picking up one challenge and facing another,” said Hughes.
“Deep in the minds of property managers, there will be: ‘When can we open, how much money will come out when we reopen, and what can we do about Brexit when this storm returns? ‘”
The Covid crisis is the second major event in four years that has prompted asset managers to spoil real estate funds.
The UK’s vote to leave the European Union in June 2016 sparked a wave of deal suspensions as asset managers froze real estate funds to help manage large outflows from nervous investors.
Teodor Dilov, fund analyst at Interactive Investor, said: “Some funds may reopen next year, but they are likely to be frozen for another six months. We also have another obstacle to Brexit, which will create even more uncertainty. “
UK and EU Brexit negotiators agreed on June 15 to try to reach a trade deal by the end of the summer. The UK has already told the EU it will not ask for an extension of the December 31 deadline.
Jason Hollands, managing director of wealth manager Tilney, said UK property funds are likely to remain closed “for some time yet” given low levels of commercial property transactions.
Funds that choose to reopen will also face investors potentially rushing for the exit, he said.
“Given the negative outlook for occupancy rates and the outlook for rental growth, these funds will need significant cash reserves to meet likely repayments when they reopen,” Hollands said.
Adrian Lowcock, head of personal investments at Willis Owen, said real estate funds are unlikely to want to risk having to suspend again if they reopen too soon.
“Removing the suspensions is a bit like getting out of the lock. You don’t want to rush, but it’s also not good to leave it too late, ”he said.
“The big problem, however, is the state of the economy and the performance of the markets towards the end of the year. A weak economy could put pressure on the asset class.
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