Frozen UK property funds face existential crisis

LONDON (Reuters) – UK real estate funds are expected to remain frozen for months as the market is unvaluable due to the coronavirus crisis, and some may have to change structures to survive, industry sources say.

FILE PHOTO: Empty offices are seen as the spread of coronavirus disease (COVID-19) continues, in London, Britain March 19, 2020. REUTERS / Dylan Martinez / File Photo

Ten large open-end real estate funds tracked by Morningstar, with a total of £ 6.5 billion ($ 8 billion) under management, barred investors from getting their money out in mid-March, saying appraisers could not not accurately assess real estate assets in a plummeting economy.

With question marks over the future of office work, the crisis of retailing, and the housing market just reopening, house prices are set for a major readjustment, but a shortage of transactions means that the magnitude of the change is still unclear.

“This is a crisis like no other,” said Ben Sanderson, director at Hermes Real Estate Investment Management

“In the short term, it’s going to be extremely difficult. “

Many funds that Morningstar tracks are aimed at retail investors who might withdraw their money on a daily basis, managed by well-known names like Aviva. AV.L and legal and general LGEN.L.

These funds were also put on hold during the 2008/09 financial crisis and after the Brexit vote in 2016 because their hard-to-sell assets prevented them from meeting daily redemption requests.

But this crisis has spread further to the UK’s £ 70 billion real estate fund industry.

For the first time, funds intended for institutional investors such as charities and pension funds have also closed.

These funds generally only allow monthly or quarterly redemptions.

Twenty of 29 institutional funds in the MSCI / AREF UK All Balanced Property Fund index have suspended or deferred redemption payments, Reuters survey finds, including funds managed by BlackRock BLK.N, Hermès federated FHI.N, Savills and Schroders SDR.L.

Three with different structures remained open and six did not respond to requests for comment.

DAMAGED TRUST

Industry sources have said funds are unlikely to be thawed until September, and what happens then is unclear.

Suspensions allow funds to treat clients on an equal footing, preventing a rush to exit, meaning the slower get a lower price for their investments.

The funds claim that these suspensions are linked to valuation issues and, exceptionally, do not follow a flood of redemption requests.

However, Morningstar data shows £ 126million left the major funds it tracks in the first half of March before they were suspended, up from £ 103million for the whole of February and 43million in January.

Investors can flee once funds are reopened.

“The suspensions hurt investor confidence,” said Ryan Hughes, head of active portfolios at the AJ Bell investment platform.

Retail funds claim to have high levels of liquidity, which helps them cope with any redemptions.

Institutional funds say their investors have a long-term view and will continue to focus on real estate for diversification and yield.

But for funds that need to sell assets to raise funds, it will be difficult.

Jessica Berney, manager of the £ 2.6bn Schroder UK property fund, said the fund had completed three significant deals since the virus outbreak, but there have been no new trades in the market since during.

Buyers are waiting – Ronald Dickerman, chairman of US real estate investor Madison, has said the company would like to “provide liquidity” to fund investors – but sources say any sale would likely be at discounted prices.

The funds could close if they cannot meet redemption requests. Veteran British investor Neil Woodford’s equity income fund suspended trading last June before closing in October.

To avoid future suspensions, the funds may change structure.

Alastair Sewell, senior director of fund and asset management at rating agency Fitch, said regulatory pressure could cause funds to follow their peers in countries like Finland or Germany, where investors real estate must hold investments from three months to two years.

The funds could also become investment trusts, which contain a fixed number of units.

Reporting by Carolyn Cohn; Editing by Mark Potter


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