UK property funds are no nearer to reopening despite a general lifting of uncertainty over the value of their underlying assets, including for the problematic retail sector.
The Royal Institution of Chartered Surveyors (RICS) announced a general lifting of valuation uncertainty for all real estate assets, but noted some sectors valued with reference to trading potential, such as leisure and hospitality, might be difficult to price with a sufficient degree of certainty.
UK property valuers invoked material uncertainty clauses in March as coronavirus volatility made it difficult for valuers to price real estate assets. As a result, several open-ended property funds were forced to suspend trading.
According to RICS, the measure is “intended to be short term in order to address sharp and unpredicted shocks to a market leading to a temporary suspension of market activity”.
In July, material uncertainty was lifted for central London offices and professionally managed, institutional grade student accommodation, which at the time accounted for 5.4% of the M&G Property Portfolio.
‘Weeks, if not months to reopen’
But while the latest announcement by RICS means that UK property funds now have the ability to reopen, industry commentators think it will be “weeks, if not months” before they do.
Willis Owen head of personal investing Adrian Lowcock said the timing of RICS’ announcement could create problems for property funds with the deadline to approve a Brexit deal fast approaching and the risk of rising cases of covid-19.
“Many funds are not sitting on high cash balances at the moment, and they will be desperate to avoid a scenario where they have to close again if redemptions are too high.
“Therefore, we don’t think the situation has been resolved for investors as yet, and it could take weeks, if not months, for funds to reopen.”
Backlog of trades
Quilter Cheviot equity research analyst Oliver Creasey said the clause being removed gives the funds the ability to reopen, but not the obligation, and the fund managers’ decisions will be based largely on liquidation requests versus cash available.
“The funds typically operate with c. 20% of their assets in cash, or sometimes in liquid Reit shares, which means they can manage redemptions on all but the worst trading days.
“However, the funds have not been open to trading for nearly six months now, and there will be a backlog of trades that are put through as soon as they reopen.”
He said fund managers will be desperate to avoid a scenario where the fund reopens and then a week later is forced to close over liquidity concerns.
“That is why they may not rush to reopen until they have a good understanding of their clients’ intentions, instead they may try to let others go first and assess the likely impact.”
FCA consultation exacerbates the issue
AJ Bell head of active portfolios Ryan Hughes said the recently announced FCA consultation on open-ended property funds changing the dealing frequency from daily to quarterly could make the issue worse.
“I would expect that, as soon as these funds reopen, many investors will be looking to sell their investments before any potential change in rules comes into force and this will force fund managers to start selling commercial properties into a very uncertain market,” he said.
“With a potential raft of properties hitting the market at a time when there will be few buyers, there is the very real risk that not only do prices take a hit, but this could easily result in them suspending again because they can’t raise cash quickly enough to fund redemptions.”
M&G Property Portfolio remains closed
An update on the M&G website on 08 September said the M&G Property Portfolio remains closed to protect investors, despite the fund’s independent valuer Knight Frank lifting material uncertainty clauses from all sectors except retail, leisure and hospitality.
M&G said, as of 28 August, that54% of the fund’s net asset value (£1.1bn) is no longer subject to material uncertainty, rising to 64.7% – £1.4bn ($1.8bn, €1.5bn) – if cash, Reits and indirect holdings are taken into account.
The fund’s current size is £2.1bn with a cash position of 8.2% and £129.9m of assets in solicitors hands for sale.
“After the material uncertainty clauses for the remaining sectors are lifted, our focus will remain on an orderly sale of properties so we can pay any investors who wish to sell their holdings once the funds have reopened,” it said.
“While our continued priority is to restore cash levels, we are also balancing our intention to reopen as soon as possible with our responsibility to protect the interests of our long-term customers.”
In July, material uncertainty was lifted for central London offices and professionally managed, institutional grade student accommodation, which at the time accounted for 5.4% of the M&G Property Portfolio.
In June, BMO Global Asset Management lifted the suspension on its Property Growth & Income portfolio. The £490.4m fund, managed by Marcus Phayre-Mudge and George Gay, had much less exposure to UK physical property than some of its peers with 28.8% held in the asset class.
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