Fund managers are being warned by the City regulator not to embark on fire sales of office blocks and shopping centres to meet the demands of customers trying to cash in investments from property funds.
Since the EU referendum on 23 June, more than half a dozen commercial property fundshave taken steps to adapt to the changing economic backdrop. Some have prevented customers withdrawing their cash by suspending trading; others have announced fund devaluations, including Aberdeen Asset Management, which devalued by by 17%.
The Financial Conduct Authority reissued guidance to remind the investment industry of their duty to treat all customers fairly – including those who want to remain in a fund.
“It is the duty of the fund manager to ensure that assets are valued fairly and accurately and to ensure that any subscriptions or redemptions of units take place at a fair price. Failure to do so may lead to some investors gaining at the expense of other investors in the same fund,” the FCA said.
“If a fund has to dispose of underlying assets in order to meet an unusually high volume of redemption requests, the manager must ensure these disposals are carried out in a way that does not disadvantage investors who remain in the fund or are newly investing in it,” the regulator added.
Its new chief executive, Andrew Bailey, said earlier this week that the structure of these funds – which offer instant redemption on assets that are difficult to sell – might need to be reviewed.
The commercial property sector has been a focus since the Brexit vote and there are predictions that some properties could fall by 20% in the wake of the UK’s vote to leave the EU.
Analysis by brokers at UBS found that some Brexit clauses were being triggered in commercial property transactions, causing some deals to fall through. UBS also expects the outlook to remain uncertain until negotiations over passporting rights – which give firms in the City of London the ability to transact across the EU– are finalised.
The UBS analysts said they expected London office values to fall by 20% – an increase on their previous 15% estimate. Falls in the price of other commercial properties would not be so large. But, they said: “At this early stage, there is limited evidence to point towards, to assess the potential magnitude of the impact on the commercial real estate market.”
The analysts said: “We have heard of some so-called Brexit clauses being triggered, causing deals to fall through. The long-term demand picture in London is uncertain as banks investigate the potential impact of a withdrawal of passporting rights, while the near-term outlook is also difficult. So the direction is certainly down, but the magnitude is uncertain.”
The scale of the fall is not expected to reach the 44% decline that took place from 2007-09 when the financial crisis was at its peak. Since then, the market has changed, with banks making up less of the lending to the sector: the Bank of England’s data shows bank exposure has fallen to £85bn from £150bn in 2011.
Mike Prew, an equity analyst at Jefferies, has said up to £5bn of buildings could be sold to find the cash to repay investors in the funds, which some experts have warned could be closed until the end of the year.
But Laith Khalaf, a senior analyst at Hargreaves Lansdown, said the reduced prices might not result in actual sales of properties. “The mark down in asset prices is really an educated guess, and it may not be borne out by real-world transactions, for better or worse, though with such sharp adjustments there appears to be a lot of bad news in the price.”
UBS said that between 2008 and 2015, overseas buyers constituted two-thirds of office property transactions in the UK, so for them, the market is effectively already 10-13% cheaper because of the fall in sterling. This may encourage them to keep coming into the market although the caveat is that their rental return is also 10-13% lower.
The UBS analysts said: “Of course, sterling weakness may be a short-term impediment to investment if investors expect the currency to weaken further.” They calculate that the shares of stock market-listed property companies are pricing in a 25-30% decline in property value.