Property funds redemption: is the end nigh?

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It started on Monday. Just over a week after Britain voted to leave the EU, trading in Standard Life’s £2.7bn UK Real Estate Fund was suspended.

Just 24 hours later redemptions on more than £8.9bn of open-ended retail property funds had been halted. The question on everyone’s lips: who would be next, was it all happening again?

The shock for some might have come from the fact that mainstream media were reporting the issue. Property is a small proportion of funds under management in the UK, representing £24bn of the total £930bn, according to the Investment Association. Was it time to start stocking up on tinned food, or had we learnt enough from 2008?

Standard Life might have been the first, but it was quickly followed by Aviva and M&G, which had already reported it was moving from monthly to weekly valuations.

The last time Aviva closed a fund, its £91m European Property Fund in November 2008, it stayed that way for 13 months. Falling asset values and credit market fears resulted in a  number of investors pulling out of real estates funds in the UK.

It triggered a cut-price sale as investors looked to exit funds amid eurozone turmoil. By the summer of 2008, UK property funds had suffered their worst 12 months on record, from June 2007 to the end of June 2008. Investors lost an average of 20% over the period, the lowest figure since records began in 1989.

An influential PwC report commissioned by the Association of Real Estate Funds in 2012 called for new products to meet the demands of investors as a result of the financial crisis and said funds must improve the quality of communication with investors.

Fast forward to today and many real estate funds for only institutional investors made significant changes to governance, liquidity etc following the crisis to deal with exactly the sort of situation we have now, said John Forbes of John Forbes Consulting. “From what I can see, these funds are facing only very limited redemptions,”he said.

Funds with retail investors have to comply with the Non UCITS Retail Scheme rules, which force liquidity on them. “The real estate industry did lobby the FCA for change on this in 2012. The funds are now taking an entirely sensible step to manage an orderly retreat precisely to avoid the sort of rout that occurred in 2008.”