July 07, 2016

Property funds halt trading as Brexit fallout deepens

Surge in requests to redeem investments prompts freeze on funds as sterling tumbles to 31-year low and Bank of England says risks have crystallized

Simon Goodley and Jill Treanor

Tuesday 5 July 2016 14.09 EDT Last modified on Wednesday 6 July 2016 03.53 EDT

The fallout from the Brexit vote reverberated through the markets on Tuesday as two more City property funds barred investors from withdrawing their cash and the Bank of England warned that risks to the financial system had begun to “crystallise”.

City watchers warned that further property funds would be forced to bar withdrawals as investors race for the door amid fears of a plunge in the values of office blocks and shopping centres in post-Brexit Britain.

The suspensions came on another day of drama on the financial markets, 11 days after the vote to leave the EU wrong-footed investors and sparked political turmoil. Developments included:

• The pound plunging to a new 31-year low against the dollar, falling 2% to $1.30 at one point.

• Aclosely watched survey of the services sector coming in worse than expected, indicating a sharp slowdown in the wider economy.

• The Bank of England easing regulations on banks to allow them to release up to £150bn worth of loans to households and businesses.

• Chancellor George Osborne held a summit with the heads of the major high street banks, who pledged to avoid a new credit crisis by making loans available.

The property funds barring withdrawals included M&G Investments , which runs a £4.4bn property fund, and Aviva Investors, whose fund has assets worth £1.8bn.

The moves came one day after Standard Life banned its clients from doing the same on its £2.9bn property fund, with the firms saying they had acted to stop a rush of withdrawals following “extraordinary market circumstances”.

Investors have been buying into commercial property funds to try to benefit from the 40% rise in commercial property prices since the 2009 crisis. But concerns that the market may have peaked before the referendum – plus fears on the impact of the Brexit vote on the UK economy – has triggered nervy investors to ask for their cash back.

Large-scale outflows cause problems for commercial property funds because they are based on assets that are difficult to sell quickly when investors want their money back. Restrictions on withdrawals are then put in place to give fund managers time to sell their properties. Otherwise, they would be forced to sell assets at fire-sale prices to fund the redemption requests. That would drive down the fund’s value, encouraging more investors to cash out, creating a vicious circle.

The Bank of England said in its half-yearly assessment of risks to the financial system published on Tuesday said that some of the risks to the financial system it had warned about in the run-up to the referendum had “begun to crystallise”, including the possible downturn in the commercial real estate market.

Around £35bn – or 7% of the total investment in UK commercial property – is invested in commercial property funds, which offer private investors a chance to gain exposure to huge office block developments and shopping centres. M&G’s fund has invested in properties including New Square Park, a 250-acre office park near Heathrow airport, and the eight-storey 3 Hardman Square office block in Manchester; while Aviva holds sites including 20 Soho Square development in central London and the Guildhall shopping centre in Exeter.

Andrew Bailey, the newly installed chief executive of the Financial Conduct Authority, the City watchdog, said the current situation “points to issues that we need to look at in the design of these things” and insisted there was no cause for panic.

Bailey’s comments came as the FTSE 250 index, which contains more UK-focused companies compared with the FTSE 100, closed down 382.02 points, or 2.37%, to 15,734.68. City commentators also queued up to warn of further woe for the commercial property sector, predicting that other funds would be compelled to temporarily prevent withdrawals.

Simon French, chief economist at stockbroker Panmure Gordon, said: “Commercial real estate looked very vulnerable as we entered the referendum with most finance directors thinking the stuff was overpriced before Brexit. Add that to the fact that material changes to immigration and market access will affect prime office space occupants and a financial sector most correlated to GDP slowdown, then this looks like a perfect storm.”

Laith Khalaf, senior analyst at financial firm Hargreaves Lansdown, added that banning investors from redemptions could happen to any of the funds. “We have now had two in very short succession. It suggests that we are on the cusp of others.”

Click on Link:
https://www.theguardian.com/business/2016/jul/05/aviva-halts-trading-in-its-property-fund-brexit-standard-life