Twelve month ago, six UK open-ended commercial property funds suspended trading in the immediate aftermath of the EU Referendum. In a bid to discourage mass outflows, funds including Henderson UK Property, M&G UK Property Portfolio, Standard Life UK Real Estate and Aviva Investors Property Trust also swung their prices down from offer to bid or mid pricing, thereby lowering the prices of the funds by around 5%-6.25%.
Threadneedle's Jordison disagreed with the FCA’s findings
The near-term cause of all this was the uncertainty caused by the outcome of the Brexit referendum, as there were fears that companies are going to leave London as a result of Brexit.
The Threadneedle Property fund was among those which closed trading. Don Jordison, managing director of property at Columbia Threadneedle said he believes such activity will not happen again.
“I think people are slightly embarrassed about their emotional reaction to the referendum result,” said Jordison. “It is unfair that the property sector got caught in the crossfire of all the bad sentiment. So far, we have not seen any kind of redemption activity after the triggering of Article 50 nor the Hung Parliament, so I think we are out of the woods.”
Investors Overreact to Brexit Vote
Jordison believes that investors overreacted to the referendum outcome, and this lowered investor confidence in the property sector.
“The belief that companies would leaving all their commercial property saw people fooling around making fair price adjustments. This just led to a lack of confidence in the sector that got completely got out of control,” said Jordison.
However, the incident highlighted a significant concern among property investors: the mismatch between the liquidity expectations of investors and the illiquid nature of property funds’ portfolio holdings.
“The funds in question are open-end funds providing daily liquidity to investors. That’s all fine and well when a fund owns assets which can be readily bought and sold to either put incoming cash to work or raise cash to meet investor redemptions,” explained Muna Abu-Habsa, director of cross border ratings at Morningstar.
“However, these funds invest the vast bulk of their assets directly in property. Their portfolios consist therefore of buildings and land, which can take months, if not years to buy and sell. The mismatch between the open-ended structure of daily-dealing direct property funds and the illiquid nature of their underlying investments is bad for investors.”
FCA Report on Illiquid Assets
Last week the Financial Conduct Authority issued a report regarding the future of investing in illiquid assets through open-ended investment funds. The regulator urged property fund managers to improve their practices after finding they "did not adequately plan" for the series of fund suspensions implemented last summer.
It added that some firms did not consider the impact of their actions on distributors, and said providers could also "improve their communications to platform providers" in order to aid end investors.
Jordison disagreed with the FCA’s findings.
“They said the property funds are not prepared for the fallout from the Referendum. We had 22% of liquidity in our portfolio, we had another £100 million worth of properties prepared for sale, and we had a funding containment for two years, which means we have not sold to new clients for two years prior to the referendum. I do not know how much more prepared you can be, to be honest,” said Jordison.
However, Jordison did agree that communication is the key when it comes to commercial property fund investments.
“I think if the regulator should be concerned about anything, it’s the improper and bad timing the pricing adjustment that makes the bad situation worse,” he said. “As long as you communicate accurately and in a timely manner about what is going on to your shareholders, it will be alright. We were the last to suspend and the first to open our property fund.
“We knew what the problem was – the problem was it was bloody summer holidays, I could have sold more properties in winter when everyone was around than when they were in the beach.”
Looking forward, Jordison believes the future of the commercial property funds remain robust, providing a sustainable and stable income yield of over 5% to investors.
