More funds bar investors from cashing in assets

Investors have been barred from cashing in their assets in two more big commercial property funds amid widespread disposals of UK assets on fears that the economic fallout from last month’s vote to leave the EU was gathering pace.

The UK's largest commercial property fund, M&G's £4.4 billion Property Portfolio, said on Tuesday it had suspended trading on Monday after similar moves by a £2.9 billion Standard Life fund and a £1.8 billion fund from Aviva.

The moves sparked concern that forced selling of buildings by investment funds could act as the catalyst for a steep drop in commercial property prices, as happened during the 2008 financial crisis.

“You can very quickly get a downdraught moving through the market,” said Robert Duncan, analyst at Numis Securities.

It also emegred yesterday that regulators will meet the UK’s largest asset managers to discuss the effect of Brexit on the industry. However, central bank sources said the meeting had been arranged before the funds stopped allowing withdrawals.

Policymakers rushed on Tuesday to emphasise that the seize-up was confined to the sector of “open-ended“ funds in real estate that normally allow investors to exit at will, and did not signal a liquidity problem in wider financial markets.

However other shares and funds in the commercial property sector also faced a sharp sell-off on Tuesday as the implications set in that assets could be due for a fall.

Commercial property has wider implications for the financial system because it is often used as collateral by companies that borrow from banks.

The three suspended funds collectively account for nearly a third of the £35 billion in open-ended British commercial property funds, which the Bank of England had flagged as a major risk ahead of the June 23rd vote.

While open-ended funds tend to hold a pile of cash or similar assets to manage redemptions, in a worst case scenario they could turn into forced sellers of buildings in a falling market as more investors seek to redeem. Suspending trading is a measure designed to prevent that from happening.

Among other large holders of commercial property which could be hit if the market jitters turn into a longer-lasting sell-off are the banks, which are due to report their half-yearly results in the coming weeks.

Spooked investors sold out of a range of stocks connected to the industry on Tuesday, including property firms, listed real estate investment trusts, asset managers and insurers.

“When open-ended funds close the gates the market starts getting nervous,“ said Collette Ord, an investment trust analyst at Numis said. “The danger is if open-ended funds have to sell assets at distressed levels, that will then lead to price discovery and force listed trusts to also write down assets.“

Concerns that weaker consumer sentiment could spread to other investments added to pressure on asset managers and insurers, which are already grappling with stubbornly high investor outflows and a dearth of investment income. – Bloomberg / Reuters