Paul Paling
Posted on 8 Jul 2016

Post-Brexit property fund fallout – what the headlines won't tell you

In recent days three large commercial property funds managed by M&G Investments, Aviva and Standard Life, have suspended redemptions following the Brexit vote.  There is little doubt that more will follow.

Investors have been buying into these commercial property funds with the aim of benefiting from a secure rental income and a rise in commercial property prices. However, concerns about the impact of the exit vote on the economy and property prices has seen investors rushing to withdraw from these funds.

On the face of it the headlines look gloomy – after all, this is the first time since the start of the 2008 financial crisis that we have seen a suspension in redemptions in property funds.

Whilst this news will undoubtedly hit the headlines, it is important to consider the different ways that property funds are structured − and how in reality the majority of property funds will actually be protected.

Open ended vs closed funds

The funds in question are open ended funds rather than closed funds.  A closed fund has a fixed date when it is wound up and then the assets will be sold in an orderly manner. Even then, the investors and managers may look for an early sale or an extension to the life of the fund, if market conditions dictate.
 
An open ended fund means that investors can put money in, and more importantly, take it out at will. Due to the size of these funds they hold some very lumpy assets (shopping centres, large office blocks etc.) which simply can't be converted to cash quickly.
 
Typically, only the really big funds (such as M&G, Aviva, Standard Life – which were the first three to suspend redemptions) are truly open ended, working on the basis that the relatively small amount of cash they have put aside will cover any day to day redemptions if they have no new investors. What has happened here is either that the funds valuers marked down the values of the assets, or there is an expectation that they are likely to drop in value, and some investors will have put in redemption notices.  By preventing any further redemptions, the fund managers believe that they are ultimately acting in their investors best interests, as they then do not have to operate on a forced sale basis where a purchaser will know that they have to get a sale away and can chip the price.
 
Most of the mid to smaller funds are either totally closed, so the investors cannot ask the fund manager to redeem their units but rather have to find their own buyer. Or they will be "semi-closed" where there might be a limit on how many redemptions the manager has to fulfil − and/or a notice period of reasonable length, perhaps six months.  This makes it a tough decision for investors to redeem with no real knowledge of where the market might be over the next six months.
 
Therefore, while the big funds like Standard Life, Aviva and M&G will hit the headlines when trading stalls, in reality, most funds will be protected from this sort of panic by investors.  Hopefully, negative headlines such as these should dry up as the finite number of open ended funds suspend redemptions and the closed funds continue as usual.  
 
On a more positive note, in terms of raising new funds, sentiment may move from "seeded" to "blind" funds.  Seeded is when property has already been bought, blind is when money is raised in anticipation of buying.  There may be a perception that funds have overpaid for existing assets and investors may now look to the funds to have a blank sheet of paper and be able to invest after the market has dropped, possibly in bargains. As always having cash available is often a strong place to be when the market is down on its luck.
 
For more information please contact Paul Paling, Head of the London Real Estate team, on paul.paling@michelmores.com or 020 7659 4658.