Wealth managers were to blame for the run on commercial property funds that followed the UK’s vote to leave the EU, according to the chief executive of one of the UK’s biggest property funds.
The £1.4bn Aviva Investors Property Trust was one of several open-ended funds that “gated” in the aftermath of the Brexit vote last June, barring investors from making redemptions for many months as property values slumped.
Property funds run by Standard Life, M&G, Columbia Threadneedle and Henderson Global Investors were also forced to stop trading, with rapid cash outflows widely thought to be down to panicking retail investors rather than professional money managers.
But Euan Munro, chief executive of Aviva Investors, said problems had arisen from professional investors and their advisers trying to profit from an arbitrage trade that opened up between open-ended funds and their listed property company counterparts.
Mr Munro said he believed these investors wanted to sell their units in open-ended property funds in order to buy shares in listed real estate investment trusts (Reits) as these were already trading on deep discounts.
“[Reits] reacted immediately post-Brexit to a 15 per cent discount, so professional investors — and it was nearly always wealth managers and professional investors — said ‘I’m going to sell the fund and buy the Reit’,” said Mr Munro.
“Why wouldn’t you do that?,” he said, adding: “If I could have done that, of course, it would have been an interesting thing to do. Our job is not to allow people to make easy money from obvious arbitrage.”
While the share prices of Reits including Land Securities, British Land and Helical Bar reacted immediately to changing market sentiment, the structure of open-ended funds meant they had a built-in lag. Units are priced according to the underlying property valuation of a given portfolio — usually conducted on a monthly basis — but these became unclear immediately after UK’s vote to leave the EU.
Although it was expected that commercial property values would fall in the event of a Brexit vote, a lack of transactions over the referendum period made it difficult to assess the value of these assets.
The increased redemption demands caused problems for open-ended property funds, as their underlying assets are relatively illiquid and could take months to sell.
Some funds, including Aberdeen, were able to keep trading by allowing investors to sell their units at a significant discount.
Mr Munro said that when Aviva reopened its property fund in December only “one or two” investors went on to withdraw their cash. “We haven’t seen a flood because the arbitrage trade isn’t there any more, and the [share price] of Reits has gone back up,” he said.
Defending the decision to suspend trading, Mr Munro said that while allowing people to exit at “possibly the wrong price” would have caused Aviva to lose money, those entering the fund at a discounted price would have “diluted the holdings” of investors remaining in the fund.
“You’re really damaging those people that don’t sell and stay in the fund,” he added.
Mr Munro’s concerns around the pricing problems faced by open-ended property funds in the Brexit aftermath echo remarks made in December by Andrew Bailey, chief executive of the Financial Conduct Authority.
Mr Bailey told the FT that the regulator would look at the property funds’ suspension mechanism as part of its wider consultation on the asset management sector.
The last property crash in the UK, just as the financial crisis started in 2007, was preceded by a wave of gatings by open-ended property funds struggling to meet investor demands for cash. This led to ‘fire sales’ of commercial property that depressed values, increasing pricing pressure in a falling market.
The Financial Conduct Authority released a note in July, shortly after the suspension of seven funds trapping up to £15bn of investors’ money, reminding fund managers of the necessity of reporting any planned suspensions and treating all investors fairly.
The watchdog said in its note that fund managers had a “duty” to make sure their assets were valued “fairly and accurately” to prevent a situation where “some investors [gain] at the expense of other investors in the same fund,” the FCA said.
Last week the FCA launched a review of liquidity mismatches in retail funds, where investors are promised almost instant cash by fund managers holding assets that take months to sell.
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