Latest Posts

Finding Houses For Your New Property Business

Last time we looked at Market studies, one of the subjects to be researched turned into houses that might be present to be had...

The screen recording software that is available nowadays runs the gamut between the most basic of recorders to advanced tools with lots of options....

Bill Shorten rebukes Stephen Conroy over attack on governor general

Bill Shorten has rebuked a senior member of his team for making remarks critical of the governor-general. On Monday morning, Stephen Conroy accused Sir...

No Brexit general election if Boris Johnson wins Tory leadership

It is understood that Boris Johnson would not call a general election immediately if he won the Conservative party leadership election and took over...

Commercial property fund freeze – all you need to know

Commercial property funds have emerged as a weak link in the financial sector after the Brexit vote. Two funds have been suspended in successive days, and more are expected to follow. Here are some questions about how they operate and the potential knock-on effects for the wider economy.

What are commercial property funds?

3000
They are funds that allow people to invest in commercial property developments, such as office blocks and shopping centers, that normally rely on money from major professional investors.

How much money is invested in them?

Around £35bn, or 7%, of the total investment in UK commercial property, is invested in these funds.

Why are the Standard Life and Aviva funds being closed?

In the run-up to the EU referendum, investors started pulling money from these funds, presumably because they thought Brexit could reduce commercial property prices. Data from the Investment Association shows retail investors – or non-professional investors – had withdrawn £360m from property funds in May, the month before the referendum.

Brexit crisis: Pound hits $1.30, property funds frozen, and Bank of England eases capital rules
Pound plunges to a new 31-year low as property funds refuse to let investors withdraw money after a rush of post-Brexit redemption requests.

Large-scale outflows cause problems for these funds because they are based on assets – in this case, commercial property – that are difficult to sell quickly when investors want their money back. So the restrictions are being put in place to give fund managers time to sell their properties. Otherwise, they would be forced to sell assets at fire-sale prices to fund the redemption requests. That would drive down the fund’s value, encouraging more investors to cash out, creating a vicious circle.

“By limiting redemptions, funds would allow the uncertainty surrounding the UK’s political and economic environment to recede. In turn, this could stem fire sales, limiting the discounts at which funds would have to sell their holdings,” said Eduardo Gorab, a property economist at Capital Economics.

Are more funds expected to close?

Standard Life was first, then Aviva Investors announced restrictions. It is possible others will follow. Andrew Bailey, the new chief executive of the Financial Conduct Authority, said this should be seen not as a sign of panic but that the market is working properly. Suspension of funds was “designed into the structures to deal precisely with that situation where there’s been some shock to the market.”

Could this affect the residential property market?

It is not immediately clear how this feeds through into residential properties. However, a hit to sentiment in the commercial property industry can quickly feed through to homebuyers, who might decide to pull out of transactions.

The Bank of England is concerned that if all the property funds seize up at once, it could hasten any fall in commercial property prices. In its half-yearly assessment of risks to financial markets, the Bank said: “Any adjustment in commercial real estate markets could be amplified by the behavior of leveraged investors and investors in open-ended commercial property funds.” Commercial property prices were flat in the first half of the year, the Bank said, although they were up 40% since the depths of the financial crisis.

Could this affect the broader UK economy?

Around 75% of small businesses use commercial property as collateral for loans, so they could face problems with their banks if prices fall too sharply. Banks also use commercial property to count towards their capital buffers; at the end of 2015, around 55% of their core capital – their main safety net in a crisis – was based on commercial property. The big banks were less exposed to commercial property than the smaller players, the Bank of England said. The commercial property funds also invest a cash pool – which is used as a float to pay investors when they withdraw their money – in the shares of listed property developers, such as British Land. This could also exacerbate share price falls in these companies.

Latest Posts

Finding Houses For Your New Property Business

Last time we looked at Market studies, one of the subjects to be researched turned into houses that might be present to be had...

The screen recording software that is available nowadays runs the gamut between the most basic of recorders to advanced tools with lots of options....

Bill Shorten rebukes Stephen Conroy over attack on governor general

Bill Shorten has rebuked a senior member of his team for making remarks critical of the governor-general. On Monday morning, Stephen Conroy accused Sir...

No Brexit general election if Boris Johnson wins Tory leadership

It is understood that Boris Johnson would not call a general election immediately if he won the Conservative party leadership election and took over...

Don't Miss

Trains, buses and automobiles

Londoners have a tempestuous relationship with transport, and Ken Livingstone will be an outlet for their anger or gratitude come May 1. Whatever you...

The Automobile Club of Egypt by Alaa al-Aswany review – a country on the brink of violent change

In the days before Egyptian President Hosni Mubarak was ousted in February 2011, Alaa al-Aswany, dentist, novelist, and founder member of the democratic movement...

5 Places to Visit that will make you fall in love with Utah

Utah is the apple-of-the-eye of outdoor freaks, with more than 80% of the state set aside for public use. This means lots and lots...

West Indies book final with Australia after Proteas collapse

Australia will face West Indies in an ODI tri-series final after South Africa meekly surrendered to the hosts by 100 runs in Barbados. In...

The MLB prospect chasing a T20 dream: ‘I’m going all in with cricket’

As far as cultural adjustments go, the traffic jams in Bangalore grabbed the attention of Boomer Collins. Born in the open spaces of Dallas,...

Stay in touch

To be updated with all the latest news, offers and special announcements.