Following last week’s bond market turmoil, which sent shockwaves through the City, investors are now scrambling to exit UK property funds.
Since the new chancellor, Kwasi Kwarteng, presented his mini budget at the end of September, the pace at which investors are withdrawing from British commercial property funds has accelerated.
In the 10 days following Kwarteng’s presentation, more than £100million was withdrawn from a range of property funds controlled by fund trading provider Calastone, according to a Financial Times report this week. That would have been eight times the outflow of the previous three weeks together.
City analysts are now warning that the rush to drain real estate funds could lead to properties being unloaded at depressed rates.
Commercial real estate markets are already suffering from higher borrowing costs and with slowing transactions making it more difficult for key players to determine realistic valuations.
“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 in the FT.
Gauge and other property analysts expect properties for sale to change hands up to 25% less than earlier this year.
Roger Clarke, head of IPSX, a property exchange, told the FT that there is a crucial flaw in the structure of funds which typically allow buyers to exit with just one day’s notice.
“Funds are forced to sell their best assets.”
“The redeeming investors then get their redemption at the expense of the rest of the people in the fund. [if valuations decline]“, he told the newspaper.
“So the rational investor submits a redemption request,” Clarke said.
The property market turmoil follows other reports that, in an almost unprecedented rush by UK pension funds to boost their liquidity, Goldman Sachs and a range of other investment giants are planning to acquire UK assets with discounts of up to 30 percent. hundred.
Since the disastrous Kwarteng mini budget at the end of September, British pension funds have been racing to improve their liquidity by selling liquid assets.
Kwarteng’s mini-budget caused a real panic in the gilt market, which forced the Bank of England to intervene.
Despite the intervention of the Old Lady, the pension giants are now planning to put a range of illiquid assets up for sale, including private loans, property and stakes in buyout vehicles, according to various reports, including the Financial Times.
“We are seeing 20-30% discounts for a high quality wallet [of stakes in private equity funds]Gabriel Möllerberg, managing director of Goldman Sachs Asset Management, told the FT.
“It’s absolutely an opportunity,” Möllerberg stressed.
In addition to Goldman Sachs, other investors, including Blackstone, have the firepower to buy pension funds trading at prices below face value.
City AM understands that Blackstone currently has no plans to do so.
Wave of takeovers
Deals are usually negotiated and agreed privately and can take up to several months to close, but investors are confident the city can expect a wave in the final months of this year, the FT wrote.
“In these market conditions, you get some very attractive buying opportunities,” according to Ross Hamilton of the Switzerland-based private equity firm Partners Group, which buys private pension fund stakes.
“We have a dry powder of over 9 billion dollars. . . it’s an exciting opportunity for us,” Hamilton told the newspaper.
Most UK pension funds focused on illiquid assets as they wanted to inject funds into investments that were paying higher returns.
Many pension funds have turned to illiquid private markets in search of higher returns during a decade of low interest rates. However, that tide turned dramatically earlier this year.
“There is a cold wind blowing for more illiquid assets,” David Lloyd, fund manager at M&G, concluded in the FT.
He pointed out that pension plans are bracing for cash demands from buyout groups whose funds they have used to fund buyouts in recent years.