‘Chain Reaction’: UK Property Funds Start to Close Up

Tremendous market turmoil caused by the coronavirus has created uncertainty in real estate markets, as valuers lose confidence in measuring the underlying value of commercial assets.

A wave of property funds in the UK started to gate mid-week, with managers moving to temporarily suspend activity after independent valuers triggered “market uncertainty” clauses.

On Monday, Kames Capital halted its £501 million (A$1.02bn) Property Income fund, with US and ASX-listed Janus Henderson, Aberdeen Standard Investments, LGIM, Aviva and Threadneedle following suit.

UK financial services watchdog, the Financial Conduct Authority, said that it expected “material uncertainty” will likely create a domino effect.

“A fair and reasonable valuation of CRE funds cannot be established,” the FCA said in a statement.

“As a result, some managers of open-ended CRE funds have temporarily suspended dealing in units of these funds and others are likely to follow for the same reason.”

In Australia’s capital markets, A-REITs have started to dump earnings forecasts, with fund manager GPT the latest group to revise its earning guidance as “unprecedented” uncertainty hits the market.

Mirvac withdrew its 3 to 4 per cent earnings per share growth and full-year financial outlook on Wednesday.

Despite the significant withdrawal of stock in the market, valuers are still pricing A-REITs for reporting while investors move into “wait-and-see” mode.

A-REITS have fallen 30 per cent since the escalation of COVID-19 in mid-February with long WALE and industrial remaining the most resilient sub-sectors.

“The rapidly developing COVID-19 situation has seen us shift preferences away from fund managers, who rely on transactional markets for product and capital markets to fund purchases and tilt towards the residential developers who benefit from interest rate cuts and government stimulus,” UBS analysts Grant McCasker, Tom Bodor and Sam Merrick wrote in a note.

On Thursday, the Reserve Bank made an emergency rate cut as it deployed the last of its conventional monetary levers to offset the pandemic. RBA governor Philip Lowe said that the bank will attempt to hold government bonds at about 0.25 per cent and unveiled a $90 billion boost for banks.

As the chain reaction of property funds closing in the UK continues, AJ Bell head of active portfolios Ryan Hughes said that the suspension of Kames’ £501 million Property Income fund raises serious questions as to other property funds remaining open.

“With the FCA continuing to look at the appropriateness of illiquid assets in daily traded funds, surely this must spell the end of such structures to avoid damaging the confidence of investors in the funds industry,” Hughes said.