Is another property fund liquidity crisis brewing?

Some property funds for large investors are facing liquidity problems, Sam Benstead reports. 

There are once again issues for investors attempting to withdraw money from open-ended property funds – but DIY investors are yet to be affected.

Three UK fund groups are imposing new restrictions on large “institutional” investors, such as pension funds, that want to withdraw their money from property funds.

These groups are Schroders, which The Financial Times says will make some redemptions originally due on Monday as late as July next year, Columbia Threadneedle, which it says has switched to monthly rather than daily payouts, and BlackRock.

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Columbia Threadneedle runs two direct UK property funds for retail investors: CT UK Property and CT UK Property Authorised Investment. BlackRock and Schroders do not run direct property funds for retail investors.

The other large retail funds in the space are L&G UK Property (£2.25 billion), abrdn UK Real Estate Platform (£1.15 billion), and M&G Property Portfolio (£890 million).

Such funds own physical property, which is hard to sell quickly. To meet investor redemptions, which are offered daily, they hold large chunks of the portfolio in cash.

Even with cash positions of 15% to 20%, a rush to the exit from investors can lead to a scenario where the fund manager cannot meet the withdrawals quickly enough and will be forced to temporarily close access to the fund.

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In the aftermath of Brexit and the spring 2020 Covid crash, UK direct property funds shut, with some never reopening, such as Aviva Investors UK Property fund, which announced it was being wound up last year.  

However, the problems that pension fund investors are facing may not spill over to retail investors. Pension funds have to maintain balanced portfolios, and when stock and bond markets fell this year, their allocation to private property, where valuations are usually stable, meant that they had too much invested there. This triggered a wave of selling that fund managers are now having to accommodate for.

While DIY investors have not been hit by the latest liquidity crisis, Dzmitry Lipski, head of funds research at interactive investor, says open-ended property funds are “fundamentally flawed for illiquid asset classes such as property due to the liquidity mismatch”.

Lipski says: “The closed-end fund structure, such as investment trusts, is the most appropriate to access such assets, but [it is] not without weakness as discounts can widen sharply as we experienced during the Covid sell-offs.”

But he adds that frequent suspensions of property open-ended funds shouldn’t discourage investors from considering property as an asset class.

Lipski says: “The long-term fundamental case for property as an asset class remains intact and history shows that real assets such as property outperform traditional asset classes during high inflation environments.”

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The International Monetary Fund (IMF) is also concerned about illiquid assets held in liquid funds. It says that this “liquidity mismatch” can be a big problem for fund managers during periods of outflows.

It said: “Pressures from investor runs could force funds to sell assets quickly, which would further depress valuations. That in turn would amplify the impact of the initial shock and potentially undermine the stability of the financial system.”

A Schroders spokesperson confirmed that Schroders Capital UK Real Estate Fund was deferring redemptions relating to the 3 October 2022 dealing day.

They said: “This decision has been made in line with the fund’s obligation to act in the best interest of all investors. The decision will help to ensure sufficient liquidity is maintained in order to progress important asset management initiatives in line with performance-enhancing business plans.”

A spokesperson from Columbia Threadneedle Investments said: “We have introduced deferred redemptions on the Threadneedle Pensions Property Fund due to liquidity constraints resulting from the recent market volatility and a subsequent increase in redemption requests. We believe introducing this procedure is in the best interest of investors in the fund, allowing for an orderly sale of assets to meet redemption requests. We aim to return the fund to daily dealing as soon as possible.”

BlackRock decline to comment.

Source: FE FundIno, 5 October 2022.