Major investment fund managers have suspended trading in U.K. real estate funds in the latest market fallout from Britain’s vote to leave the European Union. Industry watchers are warning that London office values could fall by as much as 20 percent within three years of the country’s split from the EU. The Investment Association says U.K. real estate funds hold about 24.5 billion pounds ($31.6 billion).
1. How did we get here?
Even before the Brexit vote, there were fears that U.K. commercial properties were overvalued, with foreign flows of capital down 50 percent in the first quarter. Overall investing in the U.K. is now seen as riskier, and London office rents may take an additional hit as international businesses look elsewhere following Britain’s retreat from Europe.
2. Why are funds seizing up?
Nervous shareholders are rushing to pull out of real estate. Open-ended funds let them do so on short notice but don’t have the liquidity to carry out all the redemptions. After all, it takes a while to sell buildings. The funds often park their cash in real estate investment trusts, which themselves have been hammered since the June 23 vote.
3. Is anybody trying to help?
The U.K.’s Financial Conduct Authority is asking for daily updates on property funds, according to a person familiar with the matter.
4. Has this happened before?
During the financial crisis of 2007 and 2008, real estate funds were forced to freeze operations after withdrawals surged, contributing to a property-market slump that saw values drop more than 40 percent from their U.K. peak. Investors fled German property funds as well and some of those products still haven’t worked through their problems.
5. What’s next?
Under U.K. rules, funds that suspend trading must review the situation every 28 days. In the meantime, it’s unclear whether investors in other hard-to-sell securities might rush to redeem as well. “The net effect is to divert capital from investment into cash, precisely the opposite of what the U.K. economy needs right now,” Bloomberg Gadfly columnist Chris Hughes writes.
The Reference Shelf
- Bloomberg’s story on Aviva suspending trading.
- A Bloomberg Gadfly column on what dominoes may fall next.
- A Bloomberg QuickTake explainer on Brexit.