Echoes of 2008 as U.K. Firms Suspend Real Estate Trusts

Shoppers In Scotland's Capital City
Vehicles pass along Princes Street as the clock tower of Balmoral hotel is seen on the city skyline in Edinburgh, U.K., on Wednesday, July 31, 2013. The latest opinion polls show supporters of Scottish First Minister Alex Salmond's campaign for independence lagging behind those in favor of the status quo by more than 20 percentage points ahead of the Sept.18, 2014, referendum. Photographer: Simon Dawson/Bloomberg via Getty Images
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Two British commercial property funds suspended trading within 24 hours, and the financial regulator pointed on Tuesday to the danger to the sector from a sudden swoon caused by Britain’s decision to leave the European Union.

Aviva Investors, the fund arm of insurer Aviva (AV), suspended trading in its 1.8 billion pound ($2.3 billion) UK Property Trust on Tuesday. Late on Monday, Standard Life Investments, the fund arm of insurer Standard Life, suspended trading in a 2.9 billion pound fund, as too many investors sought to exit at the same time.

The Aviva fund owns properties including the Omni Leisure Centre in Edinburgh. The Standard Life fund owned 124 properties at the end of May including Monument Mall in Newcastle.

The suspensions appear to bear out a warning by the Bank of England ahead of the June 23 referendum on Britain’s exit from the EU that commercial property could be a risk.

The bank has pointed to a particular risk from open-ended funds which let investors demand their money back from real estate assets that can be hard to price or sell quickly.

Around 35 billion pounds ($46.05 billion) is held in these funds, the bank said. While they all tend to hold a pile of cash or similar assets to manage redemptions, in a worst-case scenario they turn into a forced seller of buildings in a falling market.

The head of Britain’s financial markets regulator, Andrew Bailey, said on Tuesday the Standard Life move showed the liquidity mismatch needed to be addressed.

“It does point to issues that we need to look at in the design of these things, because it comes back to my fundamental point about holding illiquid assets in open end funds that revalue and are required to be revalued,” said Bailey, CEO of the Financial Conduct Authority.

“My own feeling is … that we will need to come back and look at those.”

Other leading British property fund managers including Henderson Global Investors, the fund arms of insurers Prudential and Legal & General and Kames said they had already cut the value of their assets to better reflect market pricing or had made moves to price funds more regularly, but had yet to suspend any funds.

Fidelity International Investment Director Adrian Benedict said commercial property still benefited from a falling pound, a planned corporation tax cut and the prospect of more BoE monetary easing.

Strong demand from investors across the globe looking for extra yield to pay pension holders during a period of low interest rates also meant that liquidity was much better than during the last slump amid the financial crisis, he added.

“This is very different from 2008, very different… we’re not really seeing an illiquidity crunch right now.

“We’re seeing a small, relatively confined lack of liquidity in the open-ended real estate funds, but if they were to put their stock to the market, I’m pretty confident they would find a lot of interested parties. Whether that’s at a price they want to sell at is another matter.”

That did not stop spooked investors selling out of a range of stocks connected to the industry on Tuesday, however, including property firms, listed real estate investment trusts, asset managers and insurers.

At 1115 ET, Standard Life’s listed real estate fund was down 8.4 percent, while F&C Commercial Property Trust had fallen 6.6 percent and the Schroder Real Estate Investment Trust was down 9.1 percent.

“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. Schroders was down 4.7 percent, Legal and General 6.2 percent and Standard Life itself 4.3 percent.

Goldman Sachs, Barclays and Credit Suisse are among major banks forecasting a recession in the UK in the second half of 2016 or early 2017 with firms holding off on hiring and capital spending as a key reason.

While cash-rich foreign investors had been big buyers of UK property in recent years as a yield safe-haven amid global economic stress and had plenty more to spend, they may yet wait before investing more given the still-uncertain outlook for Britain as it negotiates its EU divorce, Benedict said.

A grim outlook for the UK economy and the hit to businesses from Brexit are the latest dents to investor confidence already frayed by worries over the Italian banking system, sluggish growth in Europe and China and choppy markets.

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