Expect all open-ended property funds to suspend: raft of funds close their doors

The suspensions stem from uncertainty over the valuation of UK commercial property, in light of the steep stock market falls in recent weeks amid intensification of the coronavirus outbreak. 

Both the Janus Henderson UK Property fund (which holds £2 billion of assets) and Kames Property Income fund (£585 million) have barred investors from accessing their money by putting suspensions in place.

The suspensions stem from uncertainty over the valuation of UK commercial property, in light of the steep stock market falls in recent weeks following the intensification of the coronavirus outbreak. 

Kames told investors that the challenges in accurately pricing properties are an issue for the entire property investment sector. It added: “This is due to a number of specific events that have combined to increase the level of uncertainty in stock markets, which in turn has led to periods of significant selling as we have seen in recent weeks.

"Chief among these events is the ongoing coronavirus crisis, which I know is a real concern for all of us. At the same time, we have had to contend with a sharply lower oil price as well as the impact of the ongoing Brexit negotiations. These issues are affecting all areas of the stock market, including property investing."

Meanwhile, Janus Henderson said in a statement that it has been advised by CBRE, the fund’s independent valuer, that “they have material uncertainty around the valuation of UK physical properties across the market”, adding this “is due to the Covid-19 pandemic.”

Therefore, given this uncertainty, the decision has been taken to suspend the fund.

Since Janus Henderson and Kames were the first two fund houses to suspend their commercial property funds, other firms have followed suit: Aberdeen Standard UK Property, Standard Life Investments UK Real Estate, Aviva UK Property Income and Columbia Threadneedle’s UK Property Authorised Investment fund. 

The raft of fund suspensions join the M&G Property Portfolio, which was suspended in early December, owing to “high and sustained outflows." This, however, was before coronavirus started to spread across the world. Instead the suspension was down to Brexit-related uncertainty.

In the coming days and weeks other open-ended property funds are expected to follow suit. Ryan Hughes, head of active portfolios at AJ Bell, notes: “It isalmost certain that all open-ended property funds will now have to suspend dealing.”

He adds: “In 2019, the Financial Conduct Authority announced new rules forcing the suspension of a fund where there was material uncertainty over pricing of at least 20% of the assets. Despite these rules not being due to come into force until September 2020, they have effectively been adopted by asset managers in the face of such major economic turmoil.

“Investors will understandably find these closures distressing at such an uncertain time in markets. However, there’s nothing they can do now but wait it out and hope that the suspensions don’t drag on for too long. The length of the M&G closure highlights that it’s not a quick task to offload large property assets in order to generate cash, and current market conditions will only make that harder.”

The suspensions could also spell the end of the current daily dealing structure for open-ended funds that invest in illiquid assets. The Bank of England has previously taken aim at open-ended funds with liquidity issues as posing a “systemic risk”.

In its Financial Stability Report for 2019, the Bank argued that the mismatch between daily liquidity and the ability of some funds to sell their assets quickly means “there is an advantage to investors who redeem ahead of others, particularly in a stress.”

To combat this the Bank of England report proposed a combination of longer redemption periods and a system to force those leaving the fund in times of market stress to accept a discounted price for their units.

The Investment Association (IA), the trade body for open-ended funds, has published its own idea for a new long-term assets fund structure, which is very similar to what the Bank of England came up with. 

Rebecca O’Keeffe, head of investment at interactive investor, Money Observer’s parent company, adds: “Just a few months on since M&G, and four years on since we saw several property funds suspend in the wake of the referendum, here we are again.

“Dramatic market falls will put pressure on open-ended funds which invest in illiquid assets and yet again this shines a light on the issue of liquidity and the structure of funds.

“No structure is perfect, but the closed-ended structure of investment trusts is far superior when it comes to investing in illiquid assets such as commercial property.”

Tom Becket, chief investment officer at Punter Southall Wealth, describes open-ended property funds as not being fit for purpose.

In the podcast below, Becket explains why he would never invest in an open-ended property fund, on the grounds that the structure is not suitable for retail investors.

- Browse other Money Observer podcasts here.