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Property fund suspensions raise further criticism of structures

19 March 2020

Several UK property funds have suspended trading following a sharp Coronavirus-fuelled sell off in the markets.

Standard Life Aberdeen halted trading, as did Legal & General, Columbia Threadneedle, BMO Global Asset Management and Aviva Investors. It follows suspensions by Kames Capital and Janus Henderson earlier this week.

Ryan Hughes, head of active portfolios, AJ Bell, said it was inevitable that funds would have to suspend to protect existing investors and stop investors who wish to sell redeeming at an artificially high price.

He said: “While this will be hugely disconcerting for investors who are trapped in these funds, it’s important to remember the underlying reasons for asset managers making this move.

“Coronavirus is having an unprecedented impact on financial markets and we are all having to adjust to the new reality of serious economic disruption, notwithstanding the impact it is having on people’s lives. Fund suspensions are a tool in the armoury to protect investors and as the world looks for ways to tackle the virus, this is one necessary step to ensure that financial markets do not become totally disorderly. Now is a time to be patient and over time, it is expected that equities, bonds and property valuations will settle and allow a normal market to function again.”

Darius McDermott, managing director, FundCalibre, said investors need to be mindful that the suspension is not due to redemptions or liquidity issues but because independent valuers are unable to accurately assess the value of properties in such volatile and uncertain markets.

He said: “Yes, it will be frustrating for some, but one would hope that any investors who were uncomfortable with the possibility of property fund suspensions would have left the asset class by now. Those that are left should be investing for the long term.

“It will reignite the debate about what structure property funds should have – open or closed-ended. But investment trusts will have the same valuation issues. Investors will still be able to trade their shares but are likely to suffer huge discounts if they do so. The discounts to NAVs within the UK Commercial property trust sector, for example, have widened dramatically, with some as large as 50% in some cases. I think investors need to remember that property – in whatever structure – is a long-term investment and not panic.”

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 the rules not set to come into force until September 2020, asset managers have effectively adopted the new legislation.

Hughes said: “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.

“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.”

According to Adrian Lowcock, head of personal investing, Willis Owen, further suspensions are likely to follow.

He added: “This is another crisis for the open-ended property sector and a reminder that illiquid assets do not work well with daily dealing. With the FCA’s focus on liquidity, the managers of such funds need to think how to offer their services to investors in a different structure.”

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