UK property funds send warning signals as Brexit uncertainty bites

Norwich Royal Arcade which stretches from Market Square towards Norwich Castle and was designed by architect George Skipper in 1899. Norfolk, England, UK.

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Weakness in Britain’s property market is likely to continue for the foreseeable future, market experts told CNBC, with investors recently pulling their money out of the sector and forcing some funds out of business.

Investment manager M&G halted its £2.5bn ($3.29bn) commercial property fund on Wednesday last week. The fund, one of the largest of its kind in the country, had invested in 91 commercial properties in the UK, including shopping centers and other commercial and office spaces. M&G’s move came after investors began withdrawing their money due to concerns over Brexit and the future of the retail sector.

“The unusually high and sustained outflows from M&G’s property portfolio coincided with a period when continued Brexit-related political uncertainty and ongoing structural changes in the UK retail sector made it difficult for us to sell of commercial property,” M&G Investments said in a statement. .

Nearly £57million was withdrawn from UK property funds on Thursday last week, making it the worst day so far in 2019 for outflows from UK property funds, according to the Calastone fund trading network. November was also the third worst month so far this year for UK property funds, with outflows reaching £251m.

The M&G real estate fund is not the first to encounter difficulties. Seven UK property funds have been suspended since the Brexit vote in 2016, the FT reported. Earlier this year, the suspension of Neil Woodford’s Flagship Fund also raised fears about hard-to-sell assets.

“UK property funds are being hit by political uncertainties, resulting both from Brexit and the potential fallout from the upcoming high-stakes UK election,” Francesco Filia, managing director of asset management firm Fasanara Capital, told Reuters. CNBC via email Friday.

“In markets like these, the daily liquidity feature offered by funds is a weakness more than a strength,” Filia added.

Why are these real estate funds in trouble?

The UK retail sector faces significant challenges as customers opt to shop online rather than visit physical stores. As a result, retailers are closing these stores or renegotiating rents – meaning those who own the property, such as retail parks, are also struggling.

Christmas lights decorate Piccadilly Circus in central London on December 2, 2019, London England.

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Investors are debating whether to put cash into these real estate funds, but there are also no new investors ready to buy what is being unloaded. There is a lack of liquidity in the sector where an asset cannot be bought or sold quickly. Real estate funds, such as M&G’s, therefore find it difficult to sell assets quickly enough to return cash to investors.

“There are problems (for commercial real estate funds) because they can’t get out, because there are no buyers given the uncertain future of these assets,” Roger Jones told CNBC on Friday. head of equities at London Capital, an asset management company.

“This is causing prices to spiral downwards, and I fear it will take some time before we reach a point of compensation because the future viability of these sites for retail assets is too uncertain and the alternative use is always slow to materialize,” Jones also said. .

Contagion risks

Regulators seem aware of potential contagion risks and asset managers say they are monitoring trading in their real estate funds. Other UK property funds include: Aberdeen UK Property; Owned by Janus Henderson in the UK; Threadneedle UK Property and Aviva Investors.

Aberdeen Standard Investments said in a statement, following M&G’s suspension of trading: “Our intention is to closely monitor the impact on investor sentiment towards Aberdeen UK Property Fund and the SLI UK Real Estate Fund.”

Lothar Mentel, chief investment officer at Tatton Investment Management, said in a note to clients on Friday that the managers of the UK’s other major property funds are keen to stress that the contagion will not spread.

“They claim to have enough cash to meet withdrawal requests,” he said. However, sitting on cash also raises some concerns for investors, as investment funds are expected to generate returns for their clients.

To avoid possible market fallout, the UK’s Financial Conduct Authority (FCA) recently launched daily monitoring of real estate funds.

the CIF also announced in September new rules for open-end funds investing in illiquid assets. A joint report between the FCA and the Bank of England, expected in the coming weeks, should announce further details in this area.

Ratings agency Fitch Ratings said last week that the introduction of new measures could allow customers to make redemptions in a more orderly fashion.

“Without such measures, more UK commercial property funds may have to impose extraordinary liquidity measures, particularly given the context of the Brexit process and the negative outlook for the commercial property sector,” Fitch noted.

Correction: This story has been updated to more accurately reflect the opinions given by Fitch Ratings.