Property funds: The post-Brexit effect
6 July 2016 by Ties Bouwmeester
The initial post-Brexit fallout resulted in the pound and equities taking a hit, but markets looked to have calmed down with the FTSE 100 recently moving past its pre-Brexit level. However, on Tuesday, insurance giants Aviva and M&G froze withdrawals in their commercial property funds. The move came one day after Standard Life banned its clients from doing the same, with the firm saying they had acted to stop a rush of withdrawals following “extraordinary market circumstances”.
Investors have been buying into commercial property funds to benefit from the 40% rise in commercial property prices since 2009. However, concerns that the market may have peaked, combined with fears on the impact of the Brexit vote on the economy has triggered a number of investors to withdraw their investment. The Bank of England has some serious concerns about the commercial property market. Its Financial Policy Committee warned six months ago that prices were rising at a rapid pace while rental yields were falling. On Monday, in the Bank’s half yearly financial stability report, commercial property was identified as one of five main risks that is starting to crystallise following the referendum.
Andrew Bailey, the deputy bank governor, has described Standard Life’s move as sensible as it prevents an exodus of money while the assets are revalued and buyers sought. Without this measure in place, investors at the front of the queue would be able to get their money back, while those at the back risked losing out. At £4.4bn, M&G’s fund is the largest in the country, whilst at £2.9bn, Standard Life’s ranks third. Aviva’s fund is also a substantial amount at £1.9bn. It is thought to be the first time UK property funds have halted trading since the financial crisis.
Large scale withdrawals 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 like these are then put in place to give fund managers time to sell their properties. Without these restrictions, assets would need to be sold quickly, possibly at an undervalue, to fund the withdrawal requests. That would drive down the fund’s value, encouraging more investors to withdraw, creating a vicious circle.
The Bank of England has already subjected banks to tests to ensure they can sustain a 30% fall in commercial property prices and will impose tests on them again this year. It is also easing regulations on banks to allow them to release up to £150bn worth of loans to households and businesses. However, the Bank said that there could be wider fallout from declines in commercial property prices. This is because 75% of small business loans are secured against commercial property while banks also use such loans to count towards their capital buffers. Research also suggests that every 10% fall in UK commercial property prices leads to a 1% decline in economy-wide investment.
We will keep you updated with the situation as it unfolds, but it is apparent that measures are being put in place to best prepare us for whatever the future holds in the aftermath of Brexit.
If you have any queries relating to commercial property matters, please contact Ellen Petersen on 01206 835316 or click here for more information.
- The Guardian: https://www.theguardian.com/business/2016/jul/05/aviva-halts-trading-in-its-property-fund-brexit-standard-life
- BBC News: http://www.bbc.co.uk/news/business-36708851
- The Telegraph: http://www.telegraph.co.uk/business/2016/07/05/standard-lifes-halt-on-redemptions-echoes-the-start-of-the-finan/