Property Funds Reopen but Sector Remains Troubled

Several UK commercial property funds have indicated they will reopen after closing to trading in the wake of the Brexit-vote. But there is still much uncertainty for the sector

Emma Wall 27 September, 2016 | 2:55PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Simon Molica from Morningstar Investment Management.

Hi, Simon.

Simon Molica: Hi, Emma.

Wall: So, we're here today to give a commercial property fund update. I thought we'd start by looking back on everything that's happened for that sector over the last six months since the Brexit vote on June 24th this year. What happened?

Molica: Yeah. So, there has been a lot of developments in the sector and recent developments where their intentions are to open. But like you say, let's take a step back from that and let's think about what happened.

So, even before the Brexit result, what we were noticing about the industry is the return profile was probably going to be less going forward and we were expecting more of an income profile from the return as opposed to a large total return which is what we'd seen over the previous years, especially after the recovery of the global financial crisis.

From that we also saw redemptions slowing as well. So flows into these funds were certainly slowing and started to go negative. So they had already been dropping off before the vote. Now the vote really acted as a catalyst. I think it caught a lots of people by surprise and then really what happened was redemptions suddenly sped up. It was a knee-jerk reaction to the result. It caught the industry by surprise; it caught the funds by surprise.

In some ways, I think the funds were derisking slightly in anticipation from our points earlier about the redemptions that were happening and potentially the return profile of maybe asset allocators starting to step away, but they weren't expecting what was about to happen after the Brexit vote.

Wall: And about half a dozen of funds, retail funds, closed to trading just because they couldn't service the volume of redemptions, the requests which were coming through, among them Threadneedle, Standard Life. However, things have moved on slightly since then, haven't they? And this week and last week we've started to hear about that closed to trading status being alleviated.

Molica: Yeah. I mean, there's certainly been challenges in the sector. The positives are that things seem to be coming back to normal. Obviously, what we would like to see and the asset managers themselves is for these funds to be able to open as soon as possible and to be able to be tradable again. They are meant to be daily liquid.

Obviously, the issues are, if redemptions and the amount they model going forward are too much and they don't have enough cash then they simply have to suspend. They have no option. And I guess the wider issue with that is, if one big fund suspends and then a few more, it kind of funnels the flows to the last remaining which is why you saw this gradual amount sheer volume of funds that suspended from trading. But yes, they have announced the intention to reopen. That's positive.

We started to see a few positive signs and one I really would like to talk about is the market itself, the transactional market. So, we've heard from property managers that they've been able to do a structure to control disposal program which is what the intention was so that they can treat clients fairly and not have to kind of fire sell their properties in a matter of days but actually they've done that over months. But the key is that that market seems to be transacting now.

It was pretty much close for two weeks after Brexit. But it started to pick up and because of that it means they are now getting the confidence to announce that they are either reopening like Threadneedle did on Monday and it gave two weeks' notice, or like the others that are setting some day in potentially October. So, there are positives.

The one I guess cloud that's sitting above us all is, as much as the asset managers can try to assess what kind of redemptions may come, clearly, they don't know. They can't put their hand on their heart and actually say prepare for the worst as such, but they need to reopen again which is what they are trying to do, but we'll have to wait and see what kind of redemptions come through and potentially they get forced to suspend again. I hope that's not the case. They don't think it's the case. Clearly, they have planned to reopen when they hope there would be a little bit more stability. But it's something we're not going to be able to get away for the moment.

And I guess the second point is, Brexit happened but actually Article 50 hasn't been triggered. There hasn't been much clarity. And potentially that could be another catalyst that if Article 50 was to trigger that money comes out of this sector again as potentially foreigners don't want to buy our properties and just the positivity, the sentiment around the asset class again really falls off, really drops off and that is an issue.

Wall: Simon, thank you very much.

Molica: Thanks Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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