BOE Was Warned Property Funds Were Vulnerable to RedemptionsSarah Jones
Bank of England financial-stability officials were warned a week before asset mangers halted redemptions at U.K. property funds that higher levels of outflows following the Brexit vote could force firms to freeze assets.
Open-ended property funds had seen increased redemption pressures since the vote, according to records of Financial Policy Committee meetings held on June 28 and July 1. The FPC was briefed by the Financial Conduct Authority on “the extent of outflows from these funds, and on the possibility that funds could suspend redemptions in the near term.”
Standard Life suspended trading in its 2.9 billion-pound ($3.9 billion) U.K. Real Estate fund on July 4. By July 7, a total of seven property funds with about 18 billion pounds of assets had frozen withdrawals as investors sought to redeem real estate holdings amid concerns that international companies might scale back or shut London operations, reducing the value of property.
A fall in commercial real estate values “could potentially be amplified by the behavior of leveraged investors and investors in open-ended commercial property funds,” FPC officials said, led by BOE Governor Mark Carney. That could affect economic activity by reducing the ability of companies that use commercial real estate as collateral to access finance, officials warned.
Investors had already started to pull money from U.K. property funds before the vote as analysts warned that London office values could fall by as much as 20 percent within three years of the country leaving the European Union. Real estate funds were similarly hit by redemptions during the 2008 financial crisis, forcing fire sales of assets that contributed to a slump in property prices of more than 40 percent from their peak in Britain.