Latest Posts

Sports Direct’s Mike Ashley admits paying staff less than minimum wage

Mike Ashley has admitted that Sports Direct effectively paid staff less than the national minimum wage and is in talks about compensating warehouse employees...

iOS bug lets anyone crash your iPhone with a text message

A bug in Apple’s iOS means that anyone can crash an iPhone by simply sending it a certain string of characters in a message. The...

Apple previews new mobile software iOS 8 at WWDC 2014

Apple demonstrated iOS 8, its newest version of its operating system for iPhones and iPads, at its worldwide developers conference in San Francisco. The new...

Networking flaw opens ‘millions’ of iOS app users to data theft

Around 1,000 iOS apps are affected by a weakness in their mobile security which can make it easy for attackers to access encrypted data...

Property funds halt trading as Brexit fallout deepens

The fallout from the Brexit vote reverberated through the markets on Tuesday as two more City property funds barred investors from withdrawing their cash and the Bank of England warned that risks to the financial system had begun to “crystallise”.

CmnWWXfWgAAqn5l

City watchers warned that further property funds would be forced to bar withdrawals as investors race for the door amid fears of a plunge in the values of office blocks and shopping centres in post-Brexit Britain.

Commercial property fund freeze – all you need to know

The suspensions came on another day of drama on the financial markets, 11 days after the vote to leave the EU wrong-footed investors and sparked political turmoil. Developments included:

• The pound plunging to a new 31-year low against the dollar, falling 2% to $1.30 at one point.

• A closely watched survey of the services’ sector coming in worse than expected, indicating a sharp slowdown in the wider economy.

• The Bank of England easing regulations on banks to allow them to release up to £150bn worth of loans to households and businesses.

• Chancellor George Osborne held a summit with the heads of the major high street banks, who pledged to avoid a new credit crisis by making loans available.

The property funds barring withdrawals included M&G Investments, which runs a £4.4bn property fund, and Aviva Investors, whose fund has assets worth £1.8bn.

The moves came one day after Standard Life banned its clients from doing the same on its £2.9bn property fund, with the firms saying they had acted to stop a rush of withdrawals following “extraordinary market circumstances”.

Investors have been buying into commercial property funds to try to benefit from the 40% rise in commercial property prices since the 2009 crisis. But concerns that the market may have peaked before the referendum – plus fears on the impact of the Brexit vote on the UK economy – has triggered nervy investors to ask for their cash back.

Large-scale outflows cause problems for commercial property funds because they are based on assets that are difficult to sell quickly when investors want their money back. Restrictions on withdrawals are then 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.

The Bank of England said in its half-yearly assessment of risks to the financial system published on Tuesday said that some risks to the financial system it had warned about in the run-up to the referendum had “begun to crystallise”, including the possible downturn in the commercial real estate market.

Around £35bn – or 7% of the total investment in UK commercial property – is invested in commercial property funds, which offer private investors a chance to gain exposure to huge office block developments and shopping centres. M&G’s fund has invested in properties including New Square Park, a 250-acre office park near Heathrow airport, and the eight-storey 3 Hardman Square office block in Manchester; while Aviva holds sites including 20 Soho Square development in central London and the Guildhall shopping centre in Exeter.

Andrew Bailey, the newly installed chief executive of the Financial Conduct Authority, the City watchdog, said the current situation “points to issues that we need to look at in the design of these things” and insisted there was no cause for panic.

Bailey’s comments came as the FTSE 250 indexes, which contains more UK-focused companies compared with the FTSE 100, closed down 382.02 points, or 2.37%, to 15,734.68. City commentators also queued up to warn of further woe for the commercial property sector, predicting that other funds would be compelled to temporarily prevent withdrawals.

Simon French, chief economist at stockbroker Panmure Gordon, said: “Commercial real estate looked very vulnerable as we entered the referendum with most finance directors thinking the stuff was overpriced before Brexit. Add that to the fact that material changes to immigration and market access will affect prime office space occupants and a financial sector most correlated to GDP slowdown, then this looks like a perfect storm.”

Laith Khalaf, senior analyst at financial firm Hargreaves Lansdown, added that banning investors from redemptions could happen to any of the funds. “We have now had two in very short succession. It suggests that we are on the cusp of others.”

The stories you need to read, in one handy email

Khalaf added that around 10% of a fund’s asset value tended to be held in cash and that funds selling off their assets would inevitably put pressure on commercial property prices across the UK.

However, Bailey called for calm and said that the suspension of the funds should not been seen as a panic measure. “It’s designed into these structures to deal precisely with that situation where there’s been some shock to the market, if you like, and there’s a presumption of a valuation adjustment which is quite hard to capture in illiquid assets at high frequency,” he said. “And the purpose of the suspension is to create a pause, if you like, to allow that process then to happen. And that’s sensible, it’s absolutely sensible.”

Other analysts played down fears of a rerun of the 2009 crisis when commercial property prices plunged and banks were left nursing heavy losses on their loans.

Eduardo Gorab, a property economist at Capital Economics, said: Clearly, the uncertainty kicked up by the referendum’s result has had an adverse impact on sentiment, which has been driving outflows over the last week or two.

“However, if we are right in thinking that occupier and investment markets are well placed to weather the uncertainty, we suspect that fears of a repeat of 2009 are overdone.”

The Bank of England has already subjected banks to tests to ensure they can sustain a 30% fall in commercial property prices and will impose tests on them again this year.

However, the Bank said that there could be wider fallout from declines in commercial property prices. This is because 75% of small business loans are secured against property while banks also use such loans to count towards their capital buffers.

In its biannual assessment of financial risks, the Bank said it was “focused on the potential for adjustments in the commercial real estate market to be amplified and affect economic activity by reducing the ability of companies that use commercial real estate as collateral to access finance. Any adjustment could potentially be amplified by the behaviour of leveraged investors and investors in open-ended funds.”

Around 45% of commercial property is funded by foreign investment although there has been a 50% reduction in such investment in the first quarter of the year, the Bank of England said.

Latest Posts

Sports Direct’s Mike Ashley admits paying staff less than minimum wage

Mike Ashley has admitted that Sports Direct effectively paid staff less than the national minimum wage and is in talks about compensating warehouse employees...

iOS bug lets anyone crash your iPhone with a text message

A bug in Apple’s iOS means that anyone can crash an iPhone by simply sending it a certain string of characters in a message. The...

Apple previews new mobile software iOS 8 at WWDC 2014

Apple demonstrated iOS 8, its newest version of its operating system for iPhones and iPads, at its worldwide developers conference in San Francisco. The new...

Networking flaw opens ‘millions’ of iOS app users to data theft

Around 1,000 iOS apps are affected by a weakness in their mobile security which can make it easy for attackers to access encrypted data...

Don't Miss

London commercial market will be hit by Brexit, says property group

Uncertainty created by the vote to leave the EU will damage business confidence and hit London’s commercial property market, Great Portland Estates has warned. In...

Is city living bad for your health?

  Our planet is fast becoming an urban one. At the beginning of the 21st century, the majority of the world’s population still lived in...

Don’t treat students as customers when it comes to mental health

“Who are your customers, and how well have you served them?” The question, newly introduced into our annual performance review, knotted my stomach. As a...

Tackling global warming will improve health, save lives, and save money

A very recent study released in JAMA (Climate Change: Challenges and Opportunities for Global Health) provides a very thorough review showing how climate change...

Seven reasons to eat seaweed

So good, in fact, that seaweed might soon be an ingredient in functional foods - to make white bread, for example, higher in fibre....

Stay in touch

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