Aviva and M&G slam door as BoE warns on commercial property

Commercial property collapseAviva Investors and M&G have followed Standard Life Investments in locking investors in their property funds, as the Bank of England warns commercial property is a key risk to the UK’s financial stability.

The news comes as a Bank of England’s Financial Stability Report published today notes that foreign investment in the UK commercial real estate market fell by almost 50 per cent in the first quarter of this year. This morning the Bank of England said it was monitoring the behaviour of investors in open-ended commercial property funds, as one of the risks to financial stability in the UK.

The Bank of England warns that companies looking to use commercial property as collateral to fund other projects could be negatively impacted by the fall, as they will be less able to raise finance.

The Bank of England report says: “The UK commercial real estate (CRE) market has experienced strong inflows of capital from overseas over recent years. Foreign investors accounted for around 45% of the value of total

transactions since 2009. These inflows fell by almost 50% in the first quarter of 2016. Some of this is likely to reflect uncertainty ahead of the EU referendum, but may also reflect an adjustment after valuations in some segments of the market, notably the prime London market, had become stretched. Since the referendum, share prices of UK real estate investment trusts have fallen sharply, highlighting the risk of future adjustments in CRE prices. Any adjustment in CRE markets could be amplified by the behaviour of leveraged investors and investors in open-ended commercial property funds. Any such amplification of market adjustments could affect economic activity by reducing the ability of companies that use CRE as collateral to access finance.”

An Aviva Investors spokesperson says: “The extraordinary market circumstances, which are impacting the wider industry, have resulted in a lack of immediate liquidity in the Aviva Investors Property Trust. Consequently, we have acted to safeguard the interests of all our investors by suspending dealing in the fund with immediate effect. Suspension of dealing will give Aviva Investors greater control in managing cashflows and conducting orderly asset sales in order to meet our obligations to investors wishing to redeem their holdings.”

Hargreaves Lansdown senior analyst Laith Khalaf says: “The dominos are starting to fall in the UK commercial property market, as yet another fund locks its doors on the back of outflows precipitated by the Brexit vote. It’s probably only a matter of time before we see other funds follow suit.

“The problem these funds face is that it takes time to sell commercial property to meet withdrawals, and the cash buffers built up by the managers have been eroded by investors heading for the door, both in the run up to the EU referendum, and in the aftermath.

“These managers will now be adding to the supply of commercial properties on the market, which is likely to put downward pressure on prices. Foreign investors might be tempted in by the fall in Sterling, but equally they may decide to steer well clear of an economy in limbo.

“Investors in property funds need to focus on the reasons they bought commercial property in the first place, and consider whether they are still intact, because there may be challenging times ahead. Diversification and income are both legitimate reasons for investing in the commercial property funds, but high costs and poor liquidity are two drawbacks which investors need to be willing to shoulder before investing in the sector.”