U.K. Property Funds Freeze $12 Billion to Halt Brexit Retreat

  • M&G, Aviva and Standard Life suspend trading on outflows
  • About $32 billion is invested in U.K. real estate funds

Taking Stock of Hedge Funds Under Pressure

Three of the U.K.’s largest real estate funds have frozen almost 9.1 billion pounds ($12 billion) of assets after Britain’s shock vote to leave the European Union sparked a flurry of redemptions.

M&G Investments, Aviva Investors and Standard Life Investments halted withdrawals because they don’t have enough cash to immediately repay investors. About 24.5 billion pounds is allocated to U.K. real estate funds, according to the Investment Association.

“The dominoes are starting to fall in the U.K. commercial property market,” said Laith Khalaf, a senior analyst at Hargreaves Lansdown. “The problem these funds face is that it takes time to sell commercial property to meet withdrawals, and the cash buffers built up by the managers have been eroded by investors heading for the door.”

The pound fell to its weakest level in three decades against the dollar Tuesday, surpassing lows reached in the aftermath of the Brexit vote, as the freezing of the property funds spooked global markets. Bank of England Governor Mark Carney pledged to shore up financial stability on a day when a survey showed a plunge in U.K. business confidence.

Fund Suspensions

The rush by private investors to withdraw money prompted M&G, which held 7.7 percent in cash before the vote, to suspend its 4.4 billion-pound Property Portfolio fund and Aviva Investors to freeze its 1.8 billion-pound Property Trust on Tuesday. Standard Life halted trading on its 2.9 billion-pound U.K. real estate fund on Monday. The cash position for Aviva and Standard Life’s funds at the end of May was 9.3 percent and 13.1 percent respectively, documents showed.

For a QuickTake explainer on property-fund redemptions, click here.

“Investor redemptions in the fund have risen markedly because of the high levels of uncertainty in the U.K. commercial property market since the outcome of the European Union referendum,” M&G said on its website. Outflows “have now reached a point where M&G believes it can best protect the interests of the funds’ shareholders by seeking a temporary suspension.”

Industry commentators warn that London office values could fall by as much as 20 percent within three years of the country leaving the EU. 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 peak in the U.K.

Regulators Meet

Regulators had already planned to meet with the U.K.’s largest asset managers on Tuesday to discuss the effect of Brexit on the industry, a person familiar with the matter said. The meeting comes as the Financial Conduct Authority’s new chief executive officer Andrew Bailey told reporters that while the fund suspensions were not a “panic measure,” the regulator “may need to look at the design” of property funds.

Almost 3 billion pounds has been wiped from the market value of the FTSE 350 Real Estate Investment Trust Index since trading started Monday. Land Securities Group Plc, the U.K.’s largest REIT, tumbled 9.1 percent over the period.

Asset managers also slumped Tuesday, led by a 5.1 percent decline in Schroders Plc.

Standard Life is among firms, including Aberdeen Asset Management Plc, Henderson Group Plc, Legal & General Group Plc and M&G to adjust the value of assets in their property funds last week. Holdings in the funds range from an office building in Birmingham, to a mall in Newcastle and retail warehouses in Northampton.

‘Liquidity Buffer’

“The drop-off in inflows and then redemptions forces these funds to eat into their liquidity buffer,” much of which is held in real estate investment trust shares, Mike Prew, an analyst at Jefferies LLC, said in a note to clients on Tuesday.

A spokesman for Aberdeen said the company has no plans to suspend trading in its funds, saying that redemptions have started to slow and its U.K. property fund holds about 20 percent in cash. Henderson declined to comment, while L&G said its U.K. property fund is “well positioned” in terms of liquidity and asset management.

“The potential impact of a high-profile liquid fund suspending redemptions shouldn’t be underestimated, particularly given the uncertain environment,” said Emma Bewley, head of funds at Connection Capital in London. “While asset managers will seek to avoid suspending redemptions, they may have to use additional liquidity facilities” such as lines of bank credit.

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