The pace of withdrawals from Britain’s commercial property funds has accelerated rapidly since the government unveiled its ‘mini’ budget last month, in a move that analysts say could trigger a rush to sell properties to investors. depressed rates.
More than £100m has been squeezed out of a sample of property funds tracked by merchant fund provider Calastone within 10 days after UK Chancellor Kwasi Kwarteng announced plans to cut taxes and borrow massively from the financial markets – almost eight times the volume withdrawn over the previous three weeks.
Commercial real estate markets are already under pressure as rising borrowing costs and declining transaction volumes make it difficult to assess valuations. Now, analysts are warning that constant investor withdrawals could force funds to dump assets, driving prices further down.
“One way or another, these assets will have to be sold in a bear market,” said Zac Gauge, head of European real estate strategy at UBS.
Gauge and other real estate analysts expect sales today to be 20-25% lower than at the start of the year, before interest rates rise to contain inflation fueled by the Russian invasion of Ukraine.
Investors’ rush to claw back cash comes after turmoil in the UK government debt market forced some pension funds to sell assets to meet collateral calls on their hedging strategies.
Quick withdrawals are a problem for some real estate funds, which can take several months to shed assets from their portfolio. Earlier this week, funds managed by Schroders, BlackRock and Columbia Threadneedle announced measures to slow the pace of investor redemptions so they can sell assets in an orderly fashion.
Other major UK-based investment firms contacted by the Financial Times said their property funds were still operating normally. However, the pace of outings indicates that the pressure is mounting.
The move renewed criticism of the vehicles, which came under fire after it blocked withdrawals following the Brexit vote in 2016 and again after the pandemic hit in 2020.
Roger Clarke, head of IPSX, a property exchange, said there is a fundamental problem with the structure of funds which often gives buyers the option to exit on a day’s notice. “Funds are forced to sell their best assets. Redeeming investors then get their redemption at the expense of the rest of the people in the fund [if valuations decline]. So the rational investor submits a redemption request,” said Clarke, who expects the funds to flow if redemption requests continue.
Commercial property values have started to fall in recent months as rising borrowing costs have hurt investors’ ability to transact.
Developer Landsec last month sold 21 Moorfields, Deutsche Bank’s new London headquarters, for £809m, below the £1bn the company had hoped to make from a sale earlier in the year. ‘year.
In addition to turmoil in the government securities market, the real estate sell-off “is linked to the heightened competitiveness of bond yields tempting income investors, concerns about occupancy levels in a possible recession and heightened rollover risk. linked to rising market interest rates,” said Edward Glyn. , Head of Global Markets at Calastone.
The most likely buyers will be institutions with pockets deep enough to bypass debt markets, according to IPSX’s Clarke.
“I fear we will see a lot of UK assets being traded for sovereign wealth and foreign private funds. UK Institutional Capital [and] British savers are losing their trophies again,” he said.