Standard locks doors on property fund following investor exodus

Standard-Life-Building-700x450.jpgStandard Life has suspended dealing in its UK Real Estate fund from midday today, following a rapid increase in redemption requests as a result of the Brexit vote.

Investors are currently not able to buy or sell units in the property fund until further notice, while the managers look to raise cash by selling off some of their portfolio.

Standard Life has taken this action in order to protect investors who wish to remain in the fund, who could otherwise be negatively affected by fund liquidations.

A spokesperson for Standard Life Investments says: “Due to exceptional market circumstances, Standard Life Investments has taken the decision to suspend all trading in the Standard Life Investments UK Real Estate Fund (and its associated Feeder Funds) from 12:00 noon on 4 July 2016.

“The decision was taken following an increase in redemption requests as a result of uncertainty for the UK commercial real estate market following the EU referendum result. The suspension was requested to protect the interests of all investors in the fund and to avoid compromising investment returns from the range, mix and quality of assets within the portfolio.

“The Standard Life Investments UK Real Estate Fund invests in a diverse mix of prime commercial real estate assets from across the office, retail, industrial and other sectors. Its lower risk positioning should be beneficial for performance in times of market stress and uncertainty. The fund continues to offer a stable and secure income return with a distribution yield of c3.86% (SLI UK Real Estate Fund, Institutional Income Share – class on 15 June 2016).

“However, unlike investing in equities, the selling process for real estate can be lengthy as the fund manager needs to offer assets for sale, find prospective buyers, secure the best price and complete the legal transaction. Unless this selling process is controlled, there is a risk that the fund manager will not achieve the best deal for investors in the fund, including those who intend to remain invested over the medium to long-term.

“Approval for the suspension was received from Citibank Europe plc, in its capacity as depositary for the fund. The suspension will end as soon as practicable, and will be formally reviewed at least every 28 days.”

Hargreaves Lansdown senior analyst Laith Khalaf says: “Property funds are clearly under pressure as a result of the Brexit vote, and we could now see a new wave of investors being unable to liquidate their property funds quickly, which we last witnessed during the financial crisis.

“This is part of the problem with investing in open-ended property funds, and one of the reasons we don’t recommend them to investors. Property does offer diversification, and a reasonable yield compared to government bonds, but investors must be willing to accept high costs, and a lack of liquidity when the market turns down.

“Closed-ended property funds at least provide investors the chance to sell out during market upheaval, though widespread selling serves to depress share prices and widen discounts in times of stress. Indeed there are currently a number of closed-ended property trusts trading at discount in excess of 10%. However, being closed-ended does at least means the manager does not have to liquidate properties at a time when everyone else is looking to do the same.

“Given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices. The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilises.

“Continued low interest rates in theory provide support for commercial property, because as prices fall, yields become even more attractive. However at the moment, investors appear to be leaving the sector, rather than buying in.”

Architas senior investment manager Nathan Sweeney: “Sentiment seems to have softened towards selected property assets in the last few days as the reality of Brexit has set in and the decision by Standard Life investments to suspend dealing in their UK property fund following large outflows will cause more anxiety for investors.

“While the return profile of property will likely be lower with rental increases slowing and demand likely to fall in some sectors, investors should be wary of discounting property completely and should carefully consider why they chose to hold it within their portfolios. It is still a lower volatility, potentially attractive income play in a low growth, low yield environment.

“Although overseas investors will have taken a hit on their UK property exposure after Brexit, due to a fall in sterling, perversely it is therefore more attractive to new overseas buyers on the same basis that it is cheaper in foreign currency terms. London is still the financial capital of the world and the City draws people from across the globe. Investors understand this and are attracted by the strong legal framework and regulation of the UK property market and we believe they will continue to seek shelter in the UK property sector for the long term.

“Property funds in the UK have performed extremely well for the past three years partly due to buying by overseas investors but also supported by a general search for yield and this search has not gone away. We do though recognise that it’s important to maintain a diversified property exposure to mitigate against these sort of events. This has led us to diversify our property holdings where permissible into a spread of different property types such as industrial warehouses, student accommodation, and health care and to focus on core UK property funds that are themselves sufficiently diversified across property types. Although there may be short term impacts on UK property, whether the UK leaves the EU or not, the strong structural forces behind the trends in these specialist markets is likely to continue over the long term.”