£5bn worth of UK property funds remain suspended despite clarity on valuations

A total of £5.2bn worth of UK direct property funds remain suspended with no date set for when they will reopen despite the lifting of valuation uncertainty clauses that came into effect amid the first wave of the coronavirus pandemic.

In March, amid the Covid-19 lockdown, the the Royal Institute of Chartered Surveyors (Rics) introduced material uncertainty clauses on their independent valuations, prompting funds to suspend in line with impending Financial Conduct Authority rules. The rules, which officially came into effect in September, require funds to close when there is material uncertainty surrounding valuations on at least 20% of the portfolio.

But Rics lifted those clauses across virtually all property sectors in September and a number of funds in the Investment Association UK Direct Property sector remain suspended. Approximately half of the total AUM that is currently trapped, £2.7bn, is in funds with cash levels similar to peers in the sector that have already reopened.

See also: How will UK property fund pricing react now valuation uncertainty has been lifted?

The UK property funds that are still suspended

This month, Janus Henderson said in an update to UK Property Paif investors that it “may not be in a position to reopen until the first quarter of 2021”. Its cash levels are 20%, according to its latest factsheet.

It said this was “due to the need to further raise liquidity to meet known redemptions from the funds and to have sufficient liquidity to substantially reduce the risk of re-suspension in the short term”.

The Aegon Property Income fund also confirmed to Portfolio Adviser that it would be unlikely to reopen this year, although due to a number of redemptions just before suspension it has a cash position of just 7.5%, the lowest in the IA sector, according to FE Fundinfo.

The Aegon Asset Management spokesperson said: “The subsequent market conditions have been extremely difficult for property sales and we wish to ensure we achieve the appropriate price for the benefit of all investors in the fund, including those wishing to redeem and those wishing to remain invested.”

It is targeting 20% cash plus additional for known redemptions before it reopens, a spokesperson said.

The Aviva Investors UK Property and BMO UK Property funds also remain suspended with cash positions of 21.5% and 23.8% respectively, according to their September factsheets. Neither would confirm to Portfolio Adviser whether they were likely to reopen before the end of the year.

See also: FCA notice period proposals could be the ‘death knell’ for retail property funds

How have flows been in funds that have returned to daily dealing?

Fairview Investing consultant Ben Yearsley notes many of the funds that are remaining closed have similar cash levels to those that are reopening.

The Threadneedle UK Property Paif had 19.8% cash at the end of August, several weeks before it lifted its suspension on 17 September, the first in the IA UK Direct Property sector to do so. It faced redemptions of £68m for the remainder of the month, approximately 7% of the assets at reopening, according to Morningstar data.

Cash weightings of suspended funds in the IA UK Direct Property sector

Source: FE Fundinfo

There are not yet flow figures for the LGIM UK Property fund and the Canlife UK Property fund, which had the highest cash buffers in the sector, at 29.3% and 29.8% respectively, and both returned to daily dealing this month. Canada Life Asset Management head of UK property Michael White says flows have been “manageable” since the fund removed its 185-day notice period, which which was introduced in response to the material uncertainty clause.

The Standard Life Investments UK Real Estate fund and Aberdeen UK Property fund have cash weightings of 22.3% and 25%, according to their September factsheets, and are due to reopen on 16 November.

See also: Property funds could lose Isa eligibility as FCA mulls 180-day notice period

What DFMs expect from UK property fund managers

Yearsley reckons funds with upwards of 20% cash should be able to reopen “unless you know for a fact that you’ve got more than 20% waiting to come out”.

“I’d rather a fund open and close again because at least you’ve given investors, who want to exit immediately, the opportunity to do so.”

He says some of the funds that are remaining suspended could be waiting to see how flows play out in their peers that have reopened.

“It’s different if you’ve got no cash, but for the ones that have similar levels of cash, like Janus Henderson, I think they’re waiting to see how much Legal & General lose in the first month. I’m sure that’s not their official position but I’m sure it’s at the back of their minds.”

Janus Henderson referred Portfolio Adviser to the fund suspension update on its website when questioned about whether it was monitoring flows to rival funds.

Tilney currently holds the LGIM UK Property, Janus Henderson UK Property and SLI UK Real Estate funds.

“We know these managers very well and have invested with them for the long term, so while many people might be frustrated with how long it is taking to re-open these funds, it is important that this is done right, and done carefully – that’s exactly what these managers are doing,” says head of multi-asset Ben Seager-Scott.

GDIM investment manager Tom Sparke reckons investors would have to feel “very strongly towards the sector to jump back into these investments”. “It is a very tough situation but I think allowing investors to decide whether to take a significantly reduced market value but keeping the funds open would be my preferred route, as it provides choice to the unit-holder.”

Funds that choose to remain closed should reduce their management fee, Yearsley said.

The Aegon Property Income fund is cutting its fee by 0.15 percentage points to 0.60% from the start of November until its suspension is lifted. The M&G Property Portfolio, which suspended in December 2019 due to liquidity, has knocked 30% off its fees during the period.

Janus Henderson said full fees would continue to be charged as usual, stating the fund continues to be actively managed.

Portfolio Adviser sought clarification from all other suspended funds about whether they will reduce fees but none would provide an answer.

See also: BMO property fund reopening raises questions about scarcity of hybrid models

What ACDs are taking into account when deciding on when to reopen funds

JB Beckett has faith that the decision to reopen, which lies with funds authorised corporate directors (ACDs), would have been objective “alas that doesn’t mean there will not be mis-steps along the way”.

Becket says ACDs have a lot more to think about than cash buffers, pointing also to the health of the market, latest valuations on the portfolio stock less any uncertainty discounts, any deal flow in transit, investor mix, the size of fund, assessors used, prevailing FCA and Rics guidance, current void rates, leasing restructures and so on.

White says the lifting of the Canlife UK Property fund’s deferral period was mainly based on the removal of the material uncertainty clause and the fact the fund had a good cash balance. “We will review if liquidity fell below 10% and the market outlook remained uncertain,” he said.

A Columbia Threadneedle spokesperson says it was “important that we put our clients’ needs first”.

“Prior to reopening, the fund had continued its strategic sales programme allowing liquidity to build above the upper level of the liquidity corridor by selling properties in-line with the investment strategy of the fund. This enabled the fund to meet a potential increase in short term outflows following reopening.” The fund remains “comfortably” in its targeted liquidity range of 5-15%, the spokesperson says.

Square Mile senior investment consultant Jake Moeller says there is a “considerable” possibility funds that have reopened will have to suspend again soon.

“I suspect any cash buffer is going to be depleted in quick time but liquidity profiles differ among funds,” Moeller says. “There are varied sector and regional exposures to consider, different tenancy profiles, delinquency rates and different lot sizes.”

The primary consideration must be avoiding selling assets at fire sale prices, he says. “This doesn’t serve the interest of any investor. Those funds that have a material concern about this are going to be less inclined to open until they feel there are more orderly dynamics.”

Royal London has said it cannot guarantee restrictions would not be reintroduced on its RLP Property fund having removed them on 29 September. “Much depends on how the UK continues to emerge from lockdown as the economy reopens and how any emerging secondary outbreaks are contained,” the fund group said on its website.

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