In a stark flashback to the catalytic event that ultimately brought down Bear Stearns in 2008, and subsequently unleashed the greatest financial crisis in history, earlier this week it was reported that Standard Life, has been forced to stop retail investors selling out of one of the UK’s largest property funds for at least 28 days after rapid cash outflows were sparked by fears over falling real estate values.
As of Thursday, seven UK property funds have now frozen assets and suspended redemptions, which has so far seen over half of the GBP25billion in UK property sector suspend trading including such names as M&G Investments, Standard Life, Aviva, Henderson, Canada Life and Threadneedle.
UK’s asset management giant Aberdeen has not only halted redemption requests, but triggered a 17% cut to its asset values for anyone who wants to withdraw their money. Legal & General and F&C Investments have also cut the value of their UK property funds, as the industry seeks to stem a tide of redemption requests
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Given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices. The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilises.
More concerning is that M&G Investments and Standard Life Investments are also investors in some of the other gated funds, according to Bloomberg data.
Dig into who’s invested in the frozen property funds and you’ll find the usual real money accounts, from HSBC Global Asset Management to Baring Asset Management Ltd., that have been boosting exposures to real assets as bond yields and interest rates trend lower.
You’ll also see M&G owns more than 2 million shares in Aviva’s suspended fund, while Standard Life holds about 2.4 million shares in M&G’s fund, according to data compiled by Bloomberg based on fund filings.
Commercial property values have come under pressure since the referendum result because of doubts about the UK’s attractiveness as an investment destination outside the EU. As a consequence, commercial property funds are currently being regarded with some suspicion within the financial sector by some retail investors.
The Bank of England stated in its twice-yearly report on financial stability that some 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; around 55% of their core capital – their main safety net in a crisis -at the end of 2015 was based on commercial property.
The Bank’s report also noted that foreign investment in the UK commercial real estate market fell by 50% in the first quarter of this year.
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