What the real estate fund freeze means for investors


Investors are seeking answers from UK property funds after at least seven deals were halted amid a massive sell-off in the property market due to the coronavirus, trapping at least £ 12.7 billion in investor money .

St James’s Place joined other asset managers this week when it suspended trading in its UK commercial real estate funds, citing “significant uncertainty” or the inability to provide accurate and reliable prices for sub-assets. underlying fund.

Investors are now prohibited from withdrawing their money from the £ 1.2bn SJP Property Unit Trust, the £ 200m Property Life fund and the £ 1.2bn property pension fund .

“We are in a situation of the great unknown,” said Chris Ralph, chief global strategist at wealth manager SJP. “We are in a position where we cannot value the fund in a way that we would normally be able to do. . . and that leaves us no alternative.

This move has been mirrored by other asset managers due to uncertainty over valuations in the fluctuating market as health precautions to prevent the spread of the coronavirus mean that valuation agencies cannot visit buildings. investment and fear continues to guide investor behavior.

Aviva Investors’ £ 461million fund took a hiatus on Wednesday. Other frozen funds include Standard Life Aberdeen’s UK real estate funds of £ 1.7bn and £ 1.1bn, as well as a global real estate fund of £ 550m.

Columbia Threadneedle, Legal & General and BMO Global Asset Management have also suspended their £ 1.1bn, £ 2.9bn and £ 510m vehicles. Kames Capital and Janus Henderson suspended their real estate funds earlier this week.

Paul Richards, Managing Director of the Association of Real Estate Funds, said: “Investing in UK property is an investment in hotels, offices, shops, warehouses and restaurants across the country. Covid-19 is causing great economic uncertainty, affecting all of these businesses, and. . . appraisers can no longer assess property values ​​with a high degree of certainty.

He added: “Under these conditions, real estate funds must be suspended for the duration of this extraordinary situation, in order to guarantee the protection of investors, mainly long-term retirement savers. “

Real estate funds are likely to be affected by the coronavirus in different ways, analysts say. Holdings in hotels, recreation and retail could be expected to bear the brunt of the economic impact of the virus more than commercial or residential investments.

Investors will now have no choice but to sit back and invest in real estate funds during a time of great uncertainty for the global economy.

“They just want answers,” said SJP partner Carla Brown, describing clients calling to discuss the real estate fund freeze, but also the broader market uncertainty. “The most common question we get is ‘when are things going to change?’ and we cannot answer that.

She added, “We tell them these steps are being taken to protect the fund and also to protect their investments. By freezing the fund and suspending transactions, it protects the funds in it. “

UK property funds have been hit by significant cash outflows over the past year, creating liquidity risk issues for asset managers. In December, M&G suspended its £ 2.3bn fund after being unable to sell properties to keep pace with investor buyouts.

The M&G fund remains suspended. Including this fund, the total assets of investors trapped in UK property funds stand at £ 12.7 billion.

Real estate funds have been forced to suspend trading on several occasions. In 2016, market uncertainty and liquidity issues caused open-ended real estate funds to halt withdrawals to avoid becoming forced sellers of their illiquid assets as people rushed to redeem their investments.

But the problem that funds are talking about this week is not cash outflows, but the inability to accurately assess the value of their holdings.

Rules set by the Financial Conduct Authority require real estate fund managers to consider suspending funds during times of extreme market volatility, in order to avoid risking a “fire sale” of assets, which can be highly illiquid.

From September, funds will have to stop trading if more than 20% of their portfolio cannot be accurately valued.