Real estate funds expand their liquidity reserves following reopening


Large real estate funds are divided as they await investor panic.

While some opened their metaphorical doors as soon as they could, others remained suspended as they built up cash reserves to meet expected withdrawal requests.

A multitude of open-ended real estate funds had to suspend their transactions in March after the government lockdown to minimize the risk of Covid-19 having disabled physical inspections of property.

Anyone who has ever tried to buy or sell a home knows that a physical inspection is an integral part of the appraisal process; the same can be said for commercial property. And of course, independent valuers have declared “significant uncertainty” about valuations in the market, which has led several funds to cease trading.

As the lockdown eased, appraisers gradually lifted the material uncertainty clause from different asset classes until finally, on September 9, they removed the clause from virtually all UK real estate assets.

As funds were on hold due to significant uncertainty over valuations in the first place, there was nothing to stop them from resuming trading. However, only a few of these funds rushed to reopen once again.

St. James’s Place was the first to reopen flows in its real estate funds, having reopened the funds the next day. Columbia Threadneedle opened its real estate fund the following week.

Others took longer to think about reopening.

With regard to real estate funds, it should be noted that the Investment Association stipulates that funds in the UK direct real estate sector may invest at least 70% of their assets directly in UK real estate over rolling periods of five. years. Funds will be monitored and those that invest less than 70 percent of their assets in direct real estate during any continuous 12 month period or fall below 60 percent in any month may be removed from the sector.

This means that the space funds have a buffer of up to 30 percent where they can direct exclusively in cash if they wish. Many funds take advantage of this allocation availability.

Strong capital

The fund’s board of Legal and General Investment Management ultimately decided that the fund’s strong capital position – of 24% and 2% in retail real estate investment trusts – should help it manage redemption requests. potential, and opened the fund on October 13.

Although the uncertainty on the valuation has disappeared, uncertainty remains about the volatility of the market, which worries real estate funds.

The FCA is currently consulting on new rules for this type of fund and is expected to release the results on November 3.

The regulator has proposed to introduce redemption notice periods, under which investors should notify the fund of their intention to withdraw their investment 90 to 180 days in advance.

Some market watchers have predicted that there might be investors – who had already been without their money for months – who might want to rush out to request their withdrawal in a small window before the rules are released.

Janus Henderson cited this as one of the reasons his real estate fund remains on hold.

The manager said the fund needed to increase its capital position to cope with the asset manager’s already known redemptions, but also to protect itself for the future.

The group also said it may not be able to reopen its real estate funds in the first quarter of 2021 due to “uncertainty surrounding the looming Brexit deadline and the FCA’s consultation on the introduction of deadlines. notice on redemptions for real estate funds with indefinite duration “.

The fund’s buffer was 20% cash as of August 31, 2020.

Janus Henderson takes a cautious approach in the event of unfavorable Brexit developments, as it was one of many real estate funds suspended after the Brexit referendum.

BMO Global Asset Management’s real estate funds also remain closed as it “seeks additional liquidity, based on current investor needs.” The fund held a 23.9 percent equity position as of August 31.

“Although the independent appraisers have lifted the material uncertainty clauses on the fund’s assets, a market condition clause remains in place on asset valuations to reflect the continued impact of Covid-19 on the UK property market” BMO said.

Royal London’s real estate fund, on the other hand, held 10.2% in the money market when it reopened on September 30. The FCA found that the average cash positions were 17% in these types of funds.

“If a fund knows for sure how much money will come out the first week after it reopens and it doesn’t have enough cash to satisfy it, then it’s fair enough to stay closed,” said Ben Yearsley, consultant for Fairview Investing.

“However, I would like to ask how many funds really know their customers well? Lots of wholesalers have big piles of money direct to the customer where they have no idea who the end customer is. Does Janus Henderson know so much about his clients?

Yearsley adds: “It also raises the issue of fees. Investors pay the full fee for a 75% service only if the cash weights are high. It has been a scarecrow for quite some time now.

This article first appeared in the October 22 edition of our magazine. Now, later this week, the FCA will vote on whether to impose mandatory notice periods when its consultation closes.

Review of the 2020 suspension of open-ended real estate funds

The funds have reopened

Legal and general ownership in the UK (& feeder)

The fund reopened on October 13 at noon. The fund’s independent expert, Knight Frank, has lifted significant uncertainty clauses from all real estate sectors. Consequently, none of the fund’s direct real estate assets are subject to statements of material uncertainty.

Cash position at August 31, 2020: 25.7%

Top 3 sectors:

Industrial 37.6%

Office 28.9%

Other 14.7%

Columbia Threadneedle UK Property Authorized Investment PAIF (& feeder)

The fund opened on September 17 following confirmation from its independent appraisers CBRE that the assets are no longer subject to the material uncertainty clause imposed in March 2020 due to market uncertainty.

Cash position at August 31, 2020: 19.8%

Top 3 sectors:

Industrial 35.1%

Office 29.8%

Retail 16.7%

Authorized trust, life insurance and pension funds for the St James’s Place property

The fund reopened on September 10 following the lifting of the material uncertainty clause by CBRE, the fund’s independent expert. He is now able to assess the properties held due to the increase in transactional evidence.

Cash position at August 31, 2020: 21.9%

Top 3 sectors:

Office 39.0%

Industrial 27.9%

Retail warehouse 18.5%

LF Canlife UK ACS Property

The fund reopened on October 8 following the removal of a 185-day notice period put in place to protect investors from market volatility. This followed the opinion of independent evaluators that it was not possible to provide reliable and accurate evaluations at the time.

Cash position at July 31, 2020: 23.3%

Top 3 sectors:

Office 44.6%

Industrial 15.5%

Retail 8.6%

Royal London Real Estate Fund and Real Estate Trust

The funds reopened on September 30 after a six-month restriction on certain transactions. This follows the removal of the material uncertainty clause by Cushman and Wakefield, the fund’s independent appraisers.

Cash position at July 31, 2020: 9.8%

Top 3 sectors:

Industrial 34.6%

Office 28.3%

Retail 19.1%

Funds still suspended

M&G real estate portfolio (& feeder)

As of October 6, the fund will remain suspended until further notice. On September 9, the fund’s independent valuators, Knight Frank, lifted material uncertainty clauses across all sectors. Consequently, none of the fund’s direct real estate assets are subject to statements of material uncertainty. The fund company has indicated that it is in the investor’s interest to maintain the temporary suspension of transactions. The fund has an additional £ 234.5million in ongoing asset sales, of which 59% is in the retail sector. The next review will take place on November 3.

Cash position at September 30: 10.1%

Top 3 sectors:

Offices 31.7%

Industrial 25.6%

Retail 15.7%

Janus Henderson UK Property PAIF (and feeder)

As of October 9, the fund will remain suspended and may not be able to open until the first quarter of 2021. The property valuation of the fund at the end of September is now free of significant uncertainty. The management group spoke of short-term liquidity issues and uncertainties over Brexit deadline

Cash position at September 30, 2020: 20.0%

Top 3 sectors:

Industrial 24.4%

Offices 17.0%

Other 14.7%

Aberdeen Standard Investments UK Real Estate

Following the recommendation to remove material uncertainty on valuation by the ICS Material Valuation Uncertainty Leaders Forum on September 9, the permanent independent valuators of the fund have informed Aberdeen Standard that material uncertainty clauses on valuation will be removed. of all property held by the fund at the end of September. . The fund manager also took other factors into account, including liquidity levels and cash flow. This review, in collaboration with the custodian, concluded that the suspension was maintained, in order to allow the team to progress in the sale of assets.

Cash position as of August 31, 2020: 15.8%

Top 3 sectors:

Retail 39.6%

Other 30.2%

Industrial 18.6%

BMO UK Real Estate Fund and Feeder Fund

The fund remains closed as it seeks additional liquidity, based on current investor needs. While independent appraisers lifted material uncertainty clauses on the fund’s assets, a market conditions clause remains in place on asset valuations to reflect the continued impact of Covid-19 on the UK property market.

Cash position at August 31, 2020: 23.9%

Top 3 sectors:

Industrial 30.1%

Office 23.7%

Warehouse 12.6%

Source: Three sixty services


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