In the days since the historic vote of the UK population to leave the European Union, stock market volatility has been notable and suddenly we heard echoes of the 2008 financial crisis. The suspension of trading of three large property funds, effectively locking in investors who were rushing to exit, an even louder reminder of bad times, has caused a stampede of panic from those keen on cutting their losses.
Of course, panic feeds panic and gating funds can spread the contagion. But, in relatively illiquid asset classes, such as direct property, which requires time to sell, at whatever price market sentiment allows, generating funds quickly enough to meet redemption requests can be impossible.
If not impossible, the reason for gating may not simply be the manager’s lack of liquidity provisions – the £2.7 billion Standard Life Investments (SLI) UK Real Estate fund held almost 20% of its assets as cash or near cash (money market instruments) at 30 June 2016. According to 3cre real estate agents, another reason is that such redemptions can be extremely damaging to the remaining investors, who could see perfectly good income generating assets sacrificed cheaply at the altar of frenzied instant access.
Interestingly, among its other funds, SLI has a long income property (LIP) fund, as opposed to a balanced property fund, which has not suspended redemptions, despite holding only around a quarter of the cash assets (up to 5.5%) that the gated SLI fund held at the end of June. This is a reflection of the LIP strategy which is not aimed at those looking for short term gains. Instead it targets a long hold of secure assets to dampen short term volatility and supply steady and predictable income based on robust rental clients contractually tied in for periods of twenty years or more. This allows investors to ride out any valuation issues with the underlying property, whilst continuing to receive the regular returns, which are subject to upward only rent reviews.
It is also indicative of most commentators conclusions that these issues in the property market are an unwelcome blip rather than a long term setback for commercial property, with much less serious potential repercussions than the last global financial crisis:
On 5 July, James Beckham, head of central London investment at Cushman & Wakefield, said the shock to demand posed by the possibility of financial services companies relocating staff elsewhere in Europe would be mitigated by low vacancy rates — occupancy in central London is higher than during any of the past three market shocks. The FT also pointed out that UK banks already have much more capital than they did in 2008, to the tune of £150 billion, and that property companies, are far less indebted with levels of leverage in listed companies then at about 45% against the mid-20s to 30% today. The Guardian also noted that the Bank of England has already subjected banks to tests to ensure they can get help here if they need it and sustain a 30% fall in commercial property prices.
Amongst all of this, there’s a clear message; Adrian Lowcock, head of investing at Axa Wealth said, “whilst there is a short term issue with the asset class, I do not think this will lead to long term closure of property funds as it is driven by asset allocation decisions not by investors needing access to money.” So, if you are invested in commercial property and are concerned as to whether you should be concerned, the answer is generally, unless you urgently need to access your capital, no. History tells us that property is cyclical and that markets recover and flourish; so much so that recent research for our upcoming LIP report shows that long income funds almost match the overall property market over five years and outperform it over ten. It follows that, there’s no need to be hasty.
More details will be available in the Long Income Property Report, due for release shortly.
Related: Check out how Haan Homes sell houses in just 3 simple steps.