UK property is ‘essentially uninvestable’

As Columbia Threadneedle shutters its Paif and feeder fund

Photo by Masaaki Komori on Unsplash


Columbia Threadneedle Investments made the call to shutter its UK Paif and feeder fund with effect from noon on 10 October “to protect the interests of investors”.

“This is due to the amount of cash in the fund reducing to a level where future redemption requests would not be able to be met until an orderly sale of assets has completed,” the asset manager said.

For AJ Bell’s head of investment partnerships, Ryan Hughes, it is “a stark reminder that open-ended property remains totally unsuitable for daily traded investments”.

“It’s remarkable that this still needs to be said given this is the third time in the past six years that this situation has occured.”

He continued: “The liquidity mismatch is clear for all to see, and the highly volatile conditions currently being witnessed in markets exacerbates that risk when investors take flight and look to liquidate assets quickly. Property managers are then forced to sell into an unstable market, where buyers will be highly selective in the assets they want to purchase, creating a situation which puts the buyer in poll position to dictate the price.

“The challenges in the sector are also evident in the listed property space where Reits currently trade at significant discounts, which is essentially the trade-off for offering liquidity. With the economic outlook challenged it remains to be seen whether this discount is an opportunity, or whether NAVs will ultimately fall towards the discount.

“We still await the outcome of the FCA’s review into the dealing frequency of open-ended property funds, with the original proposal of a 180-day notice period first being proposed back in August 2020. Over two years later we appear to be no further forward, with existing investors still left in limbo and the sector essentially uninvestable given the material uncertainty surrounding the redemption terms.”

See also: Abrdn confirms £1.6bn merger of UK property funds

Not just retail property investors struggling

Investors in the CT UK Property Authorised Investment Fund and its feeder will be unable to buy or sell shares while it is gated. Both will continue to be priced daily and income will continue to be paid, however.

Columbia Threadneedle’s other retail property funds remain open and are not affected by the gating of the Paif.

The asset manager did, however, introduce deferred redemptions on its Threadneedle Pensions Pooled (TPEN) Property Fund last week, “due to liquidity constraints resulting from the recent market volatility and a subsequent increase in redemption requests”.

Fitch flagged pension funds as being a big driver behind the spike in redemptions amid the UK government’s efforts to stimulate growth, which put extreme pressure on pension funds triggering a Bank of England intervention.

At the time, a spokesperson confirmed to Portfolio Adviser: “We believe introducing this procedure is in the best interest of investors in the fund, allowing for an orderly sale of assets to meet redemption requests. We aim to return the fund to daily dealing as soon as possible and will notify policyholders as and when this will be the case.”

‘Dangerously small’ cash balance

Round one of the property fund trading suspensions was driven by those with heavy pension exposure, said Oli Creasy, property research analyst at Quilter Cheviot: “What we are seeing is round two.

“The first round was […] more of an isolated issue. However, what we are seeing today looks more like a general UK property market issue and the main Columbia Threadneedle UK property fund was suspended for redemptions until further notice.

“Whether this precipitates other UK property fund suspensions across the industry is yet to be seen. But it is worth bearing in mind that this fund is relatively small at only £484m in size as of 31 August. For context, the biggest property fund in the market, L&G, is about £2bn in size, so the CT fund is relatively small in comparison. It also had only 2.8% of its assets in cash which is a dangerously small number, and heightens the risk of suspension. The industry standard is about 15-20% in cash which means that a fund can handle most request for funds back.

“However, we believe that the CT fund managers will not have wanted to be at that level of assets in cash but were simply struggling to keep up with the pace of redemptions. One of the questions that the fund manager will have to answer is will it open up again? If investors do not withdraw redemption requests, and the value of the properties held in the fund falls due to interest rate rises, the fund could be substantially smaller than the current £484m by the time of re-opening.

“A fund below that level begs the question whether it would be better to explore winding it up and returning cash to shareholders, as some will argue the fund is simply too small to justify its existence. Investors should prepare themselves for the possibility that all assets are returned as cash rather than the fund reopening – something that has happened in the recent past with Janus Henderson and Aegon property funds.

“The question on investors’ lips will be whether other funds are also facing the risk of suspension. The answer is maybe; there have been instances in the past when contagion has gripped this market, however, it isn’t always the case. Some of the other funds in the market are better-capitalised—for example, L&G had >15% in cash as of 31 August—and therefore may be better positioned to cope with further redemptions.”

See also: Investors in limbo after Janus Henderson suspends UK Property Paif again

LTAF a sticking plaster not a solution?

Fitch Ratings has “long viewed liquidity mismatches as a structural flaw of the open-ended property fund market”.

The long-term asset fund (LTAF) structure being mooted by the FCA could become a reality sooner rather than later in light of the latest wave of liquidity mismatch issues, the ratings agency said.

“The policy discussions on redemption periods combined with the introduction of the LTAF structure have fuelled industry uncertainty over open-ended property funds. Several funds have been liquidated, such as Janus Henderson UK Property Paif in April 2022, which cited outflows as well as the LTAF framework for its decision.”

While it believes a regulatory framework on redemption notice periods would improve the property fund sector’s liquidity management and financial stability, Fitch also noted that it could deter investors and lead to further fund closures.


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