It’s been a bumpy month for many of our commercial property funds with seven of them forced to suspend trading, locking in around £15bn’s worth of investors’ money. First Standard Life, Aviva and M&G then Henderson Global Investors and Canada Life. At the same time Aberdeen Asset Management attached a 17% discount to its fund in order to providing liquidity, followed by a week’s bar on withdrawals. There is no doubt that the rush of investors seeking to liquidise assets is forcing funds to sell property they would have otherwise held onto. Forced selling is a position you wouldn’t want to be in in even if the market was strong, let alone the one we find ourselves in at the moment. Consequently, questions have been raised not only about how well retail investors understand the liquidity risk but also around the fact that technology has increasingly made it quicker to trade yet it has had minimal impact on the time taken to sell property.
Surely therefore these open ended funds can only work in an upward bound. On the way down, promising liquidity in an illiquid asset investment just isn’t possible. In 2007, when a number of funds were forced to sell property at bargain basement prices the crash of real estate markets was a significant factor in the global credit crunch. Despite all this, investors have now piled their money back into these funds, increasing their investment in UK commercial property market by 3%, up from 2% pre-2007 credit crunch to the current 5%.
Whilst we all hope investors continue with their love of property as an relatively uncomplicated, tangible asset, they may need remaining that this is an illiquid asset. This is not some revolutionary enlightenment, everyone knows that the process of buying and selling property takes time, even more so when it is a big shopping centre, warehouse or office block.
However for long-term investors rental income can still make for an attractive investment even if capital growth is looking unlikely, the potential return on your money is infinitely greater than the current rate if interest for savers. Maybe open-ended funds should be restricted to buying shares in REITs and other closed-ended structures. In addition many REITs are currently priced at a 20-30% discount with a 3-4% yield and LtV ratios of nearer 30% as opposed to the 60-70% pre-2007.
So what’s the impact of this imposed sale of billions of pounds worth of assets? Well yields are likely to drop by 0.25-0.5 but asking prices for those properties that have already been placed on the market don’t appear to have been slashed. This may be because the funds weren’t totally unprepared. Indeed, three funds had increased their cash reserves to 20%. Whilst it is impossible that an asset that only comprises 5% if the UK market could single handedly generate a crash, further regulation is almost inevitable and the monthly or quarterly trading of the open-ended institutional funds, seems like a good start. Finally it is worth noting that the upside is that there will be more opportunities not fewer, in the coming months. Whilst it is often said that investors dislike uncertainty it is often the necessary component in gaining advantage!