Commercial Property funds – A update

Posted on July 7th, 2016 | Categories - News

The fallout from Brexit continues and whilst stock markets have not seen the expected turbulence, funds investing in commercial property have hit the headlines, with some companies stopping investors withdrawing capital.

What has happened?

The funds affected are those which invest in physical commercial property, in other words, they own office blocks, retail premises, industrial units and so on.

Since the referendum result was announced, the number of investors withdrawing their capital from commercial property funds has increased substantially. Whilst all property funds hold cash to provide liquidity and meet redemptions, the increased level of withdrawal requests, which are well beyond normal levels, has created difficulties for fund managers.

This has resulted in a number of commercial property funds taking the decision to suspend trading.

In a nutshell, this means that investors cannot currently withdraw their capital from the funds affected, nor can they make additional investments.

Why has this decision been taken?

It is worth making a comparison with equity funds, which invest in stocks and shares.

To meet the withdrawal requests of investors in equity funds, the manager will simply sell an appropriate number of shares, which, even in times of stock market turbulence, is normally a quick transaction.

However, if a property fund manager is met with increased redemption requests they may be forced to sell assets. Finding a buyer, at a price which reflects the true value of the property and is not heavily discounted due to the need for a quick sale, can be challenging. Furthermore, assuming a suitable deal can be agreed, the process of completing the sale can take weeks if not months.

Therefore, to protect investors, ensure properties are sold at as close to their true value as possible and take into account the time it takes sell a property, fund managers can, in extreme circumstances, such as those in which we currently find ourselves, suspend trading for a period of time.

Which companies are affected?

At the time of writing property funds run by the following companies are affected:

  • Aviva
  • Standard Life
  • M&G
  • Henderson
  • Canada Life
  • Columbia Threadneedle

It is reasonable to expect others to be added to this list of the coming days.

What action should you take?

If you are invested in one of the property funds affected, in reality, there is very little you can do, except be patient and wait for the current difficulties to pass.

Naturally you may be concerned, in which case it is worth remembering the following:

  • The fund managers have taken these steps to protect the long-term value of your investment and to ensure that assets do not have to be sold off cheaply
  • Investments such as those in property funds are long-term in nature and difficulties such as these should be expected from time to time
  • You should remember that investors are generally rewarded for sitting tight and riding out problems such as these
  • You are invested in a diversified portfolio which will includes other types of investments, often called asset classes, and not just commercial property funds

Finally, if you are investing to help meet long-term objectives, unless these have changed recently, making immediate changes to your investments based on the referendum result is unlikely to make sense.

If the property fund you are invested in is currently still allowing redemptions, you may wish to consider your options. However, do remember, the situation may change at short notice and you fund could quickly follow the lead taken by the likes of Aviva, Standard Life and M&G.

It’s also worth remembering, that some Property fund managers may impose a temporary exit fee, such as the 17% charge imposed by Aberdeen fund managers.

Before any decisions are taken to reduce your exposure to commercial property, we would suggest you remember to take into account the points we have made above and recommend you take Independent Financial Advice before any decisions are made.

Here to help

The suspensions will be reviewed by the fund managers on a regular basis and lifted when it is deemed prudent to do so.

In the meantime, if you are at all concerned about the issues facing commercial property funds please do not hesitate to get in touch, we are here to help and can be contacted on 0115 933 8433.