Commercial property loses most in £3.5bn post-Brexit exodus

Investors in UK commercial property funds pulled out £1.4bn of their money in June as part of a massive £3.5bn exodus triggered by Brexit fears.

Figures published yesterday by the Investment Association reveal jitters leading up to the Brexit vote and in the week after the Leave victory prompted a far bigger rush for the exit in cash terms than at any point during the 2008 financial crash.

"By comparison, in the worst month of withdrawals during the financial crisis, January 2008, retail investors withdrew £561m from UK investment funds," Hargreaves Lansdown's Laith Khalaf tells the Daily Mail.

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"In October 2008, just after the collapse of Lehman Brothers, retail investors withdrew £493m from UK investment funds."

It is worth noting that funds under management in the UK are around twice what they were back in 2008. Investment Association figures show that even after the huge June withdrawal, a total of £948bn remains invested, up from £920bn at the same time last year.

Khalaf also noted that while the scale of the withdrawal might at first have seemed warranted when markets crashed in the days after the referendum, since then, the FTSE 100 and 250 have both rebounded to new highs.

Most companies that sold out "are probably regretting this decision", he told City Wire.

Jason Hollands, of Tilney Bestinvest, said "the really interesting data will come… when we find out what happened in July".

In addition to the £1.4bn taken out of commercial property funds in June, £1bn was withdrawn from UK equity funds and £813m from Europe-focused funds. More defensive bond and absolute return funds saw net inflows.

Commercial property funds controlling £15bn of investor money remain suspended for withdrawals as they seek to raise liquidity by selling buildings in order to meet redemption requests, says the Financial Times. This has fuelled fears of a major slump in prices amid a fire sale.

Prices are anecdotally not faring as bad as had been feared, however, and several funds have trimmed the "fair value discounts" they had applied.

The latest such firm to do so, Henderson, has cut its discount from five per cent to 3.5 per cent, Fund Strategy reports.

The £3.5bn fund remains closed to withdrawals as its liquid asset ratio remains below a target of 15 per cent during times of net redemptions.

Commercial property 'downturn' may not be as bad as feared

21 July

In some respects, it is setting up to be the defining economic narrative of the post-referendum period: things are bad, but perhaps not as bad as many had feared.

Following hot on the heels of the Bank of England's sentiment survey yesterday, which found "no clear evidence" of a sharp economic slump following the Brexit result, a poll from the Royal Institute of Chartered Surveyors says the commercial property market may already be in "a downturn".

Investment demand this year saw the biggest fall on record from the first to the second quarter, the Financial Times reports, with the net balance of surveyors reporting an increase in enquiries plunging from 25 per cent to minus 16 per cent.

The survey, which was taken in the days after the referendum on 23 June, found that more than a third of respondents believe the market is already in the "early stages of a downturn", adds the Daily Telegraph.

This rose to a starkly negative balance of 54 per cent in London, while demand from overseas buyers was reported as being down by a net 27 per cent.

Commercial property has been by far the worst affected sector since the referendum, with seven funds boasting a combined £15bn of investor cash forced to suspend withdrawals amid estimates that purchase prices had tumbled ten to 15 per cent in a matter of days.

But there is also evidence to suggest the market is not about to crash as it did during the financial crisis.

Legal & General this week reduced the discount applied to investors seeking to withdraw their money from 15 per cent to ten per cent, saying that "conditions in the market and within our peer group have begun to stabilise".

Aberdeen Asset Management, which closed the exit door but has since re-opened, is still applying a "fair value" discount on withdrawals of 26 per cent as it is forced to executive quick sales to raise cash for redemptions.

Its first sale did not see a dramatic discount applied, however. A building at 355-361 Oxford Street in London sold for £124m, less than the £145m asking price but well ahead of the £76m paid in 2011.

Elsewhere, the sale of Debenham's flagship building on Oxford Street achieved £400m at a modest rental yield of 2.75 per cent, while US investment bank Wells Fargo has completed the purchase of a new UK headquarters in London for £300m.

Lambert Smith Hampton, which is part of the listed property agency Countrywide, says investment declined in the lead-up to the EU vote, but it believes overall price declines will be just 11 per cent.

"Cooler heads have begun to return," chief executive Ezra Nahome said, adding that as commercial property "values have been stretched across a number of sectors for a while… the referendum result has arguably accelerated the return to fundamentals that would have happened anyway".

Brexit wipes billions from commercial property market

13 July

Billions of pounds have been wiped from the value of the UK's commercial properties since the vote for Brexit, new figures reveal.

Writing on Sky News, Ed Conway cites estimates that purchase prices across the wider market have tumbled ten-15 per cent in the wake of the referendum three weeks ago.

A property investment fund run by Aberdeen Asset Management, which suspended withdrawals last week, as investors rushed to pull their money out of the sector, has been written down by 17 per cent, or around £500m.

The fund is now open again for redemptions, reports the BBC, but it will need to sell buildings to meet the exit demand and its manager has warned it could be revalued on a "daily basis".

Legal & General has cut the value of its fund by around 15 per cent, or several hundred million pounds. Six other funds, run by Standard Life, M&G and Aviva Investors, among others, with around £12bn of investors' money remain suspended.

Around £650m of property transactions in London have been abandoned since the EU result, including the £500m sale of a development in the City, reports the Financial Times.

Conway also says there are "fresh question marks over whether the building of 22 Bishopsgate, slated to be the tallest building in the City of London, will go ahead". Backer Axa Investment Managers says it is "examining its options".

While the problems of commercial property managers can seem remote for most ordinary people, who do not have money tied up in the sector, they could have knock-on effects to the real economy.

Most small businesses use commercial property as collateral to secure lending to fund expansion. It has been estimated that every ten per cent of value lost in the sector translates to a one per cent fall in overall economic investment.

However, some observers say things are not as bad as they might appear.

The Bank of England's own advisers say the market was "phenomenally" overvalued prior to the referendum, says the Telegraph, implying a correction was due. Others argue the falls in value are far less than seen during the financial crisis.

In addition, unlike 2008, "banks remain in good health and are continuing to lend", adds Conway.

Post-Brexit commercial property crisis: Why you should care

08 July

One of the first concrete signs of negative economic effects from the Brexit vote has emerged in the commercial property sector, where funds holding more than £15bn of investors' money have now been shuttered.

Several reports draw parallels with a similar domino effect that took hold in 2008, in the wake of the credit crunch that marked the start of the global financial crash. So should we be as worried this time?

What has happened?

Earlier this week Standard Life suspended withdrawals on its £2.9bn commercial property fund that is open to retail investors. It means investors will not be able to withdraw their money for a period of 28 days - and perhaps even longer.

This triggered a wave of similar actions across the City. Prudential's M&G and Aviva Investors shuttered their funds holding a combined £6.3bn on Tuesday, while Henderson Global Investors, Columbia Threadneedle, Canada Life and Aberdeen Asset Management yesterday blocked exits on their funds totalling £6bn.

That means funds accounting for in excess of half of this part of the market have stopped investors withdrawing their money.

Why have they shut the exit door?

The funds are open-ended, so the size of their investment portfolio is directly affected when new investors buy in or existing investors pull out. Money is ultimately held mostly in illiquid property assets, with only a small amount held as a cash buffer.

Put simply, the scale of withdrawal requests is exceeding that cash buffer and without restrictions, would require the managers to dump properties to meet redemptions.

When will investors be able to get their money?

The funds are still operating as normal and paying out income received on the properties in their portfolios. But the FT notes they are not able to say when they will be able to meet exit demands until they arrange to sell assets - and they will struggle to achieve good prices as they will be seen as "distressed" sellers.

If you're an investor in these funds, or others across the sector, you're probably already sitting on losses.

Legal & General cut the value of its fund by ten per cent on Thursday, following a five per cent slash last week. Foreign & Colonial and Kames dropped theirs by five per cent, while Aberdeen cut its by 17 per cent, which is believed to be the largest writedown ever in the sector.

What do the regulators say?

Andrew Bailey, the chief executive of the Financial Conduct Authority, says this is a sign the "market is working", reports The Guardian. A "fire sale" triggering a huge devaluation in commercial property prices would lead to many investors losing money.

But the Bank of England has sounded a warning on commercial property, adds the BBC. It was already concerned that the London market in particular is overpriced and it believes an adjustment could be exacerbated in the wake of the EU referendum result.

Why are investors seeking to get out?

Because a large part of the commercial property market in London is made up of foreign buyers and Brexit might be deter them investing in Britain. Once withdrawals reach a tipping point – and especially once investors are prevented from getting their money – exit momentum can build.

Should we be worried?

Commercial property trends are not linked to the residential market, which should be less affected. Added to that, while there are echoes of 2008, when several property funds were shut, the market is in a better position and banks have bigger cash reserves now.

That is not to say this crunch won't have knock-on effects. Open-ended funds account for five per cent of commercial property market, says the Financial Times, more than in 2008. Forced selling still has the potential to trigger a major price correction.

Does that matter?

Ben Marlow writes in the Daily Telegraph that 75 per cent of small businesses use commercial property as collateral for loans. A significant slump could mean they are "unable either to refinance existing debt or to borrow to invest in new productive opportunities".

He cites research that suggests every ten per cent fall in commercial property translates to a one per cent decline in economy-wide investment. Not necessarily a sign of a big crash, then, but another indicator that growth could be markedly lower in the near future.