26th September 2016
In the wake of the Brexit vote there was much concern for property investors, especially commercial investors who had their commercial property funds locked to the tune of around £35bn.
Major companies like Standard Life, Aviva and M&G all locked down their property funds not long after the referendum result back in June. This meant that investors were not able to gain access to their money and some even found that the properties held in funds were subject to a ‘fair value adjustment’ wiping thousands off the value of holdings within the property funds by discounting them between 5% up to 15%.
Whilst the funds were locked this resulted in understandable panic among investors but all they could do was sit and wait. Property ownership is an illiquid form of investment and property funds were designed to allow indirect property ownership with investors being able to get their cash out much easier than physically owning property. This decision was therefore likely to reduce investor confidence in this type of indirect property ownership.
Several months later and now it emerges that some of the funds are reopening with others planning to reopen this month with some lifting the fair value adjustments. Whilst this was anticipated to have a negative effect on the market, some funds are upbeat about future prospects despite the downturn and these measures being put in place. As an example the M&G Property Portfolio worth around £4bn has said it expects to reopen within six weeks.
Ainslie McLennan – the manager of the Henderson property fund insists that property funds are still a viable option for investors, stating that over the summer no losses have been made, with plenty of buyers available when some sold off their ‘most liquid’ assets in the fund. Some critics state that this leaves some funds with less desirable property in them which could cause problems further down the line.
“We managed to sell assets at compelling prices. We have not had a single issue with the prices of the assets we have sold. On every sale completed we have achieved a positive return,” McLennan says.
McLennan goes on to say that this downturn in events has not put people off using property funds and that they have people waiting to get in on the act when they’re able to reopen. Others have raised this as the main issue with property funds, that they aren’t practical in the long term, especially if every small investor decides they want their cash back at once.
Those who are negative about the funds are also quick to point out that this isn’t the first time that they have found it necessary to suspend operations. The same thing happened back in 2007/8 during the then financial crisis. Critics this time around are concerned that nothing has been learned in the 8 year interval to prevent closure happening again. The likes of McLennan are certain that it was an unusual but the right decision to ensure the stability of the fund, insisting that property funds can give investors a ‘solid income’.
On average the return on commercial property funds is typically around 3%-4% which is far more attractive to investors than the low interest rates on deposit accounts.
That said a Moody’s report is expected to be published soon that will suggest a decline in UK commercial property prices of 10% over the coming 2 years which could impact the viability of funds for some.
In the wake of Brexit however most remain optimistic that property is strong enough an investment to ride this particular storm and still come out the other side.
Even months later there is still so much uncertainty surrounding the implications of Brexit that many would still perhaps think to exercise some caution. Garnering thoughts from around the property industry however might seem like a more sensible step however. Each investment might be better judged on its own merit at the time weighing up each option for long and short term investment.
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