July 26, 2016
Ten billion pounds and counting. That is the amount of investment into open-ended UK real estate funds that has become “closed” since the referendum. Is this a crisis and should we be panicking?
It is not very often that the commercial real estate sector can claim front page headlines in the national press and even less so prime-time viewing on the BBC 10 o’clock news. If ever these two things happen in quick succession it is not normally good news for our sector.
The recent vote by the UK to exit the EU has prompted a raft of sensationalist stories across both printed and digital media, with the banking and property sectors receiving their fair share of flak.
I attended an excellent post-Brexit event hosted by BNP Paribas last week at which market commentator David Buick told the audience that he would be “hopping mad” if we let the country slip into recession as it was unnecessary and entirely avoidable. He makes a good point and it is incumbent on us all to ensure that things really are different this time around.
The economy has been steadily recovering for several years, the UK banking sector is stable, regulation is robust and employment levels healthy. Continued cheap availability of finance from a banking sector keen to prudently lend, a balanced occupational market with limited future supply and a diverse and deep investor pool have meant we start the current period of political and economic instability from a solid foundation and one that is a world apart from the disastrous backdrop of 2007-08.
For all these reasons, core real estate assets in the UK should hold their value pretty well and this is a strong theme we at Palmer Capital have been playing to over the past 12 months, with a concentration of buying activity towards long-dated indexed income which continues to feel defensive.
The move by property managers M&G, Standard Life and Aviva (circa £9.5bn of combined assets) to temporarily close their open-ended funds to outflows of capital, together with their immediate reaction to make early valuation provisions of around 5% across their funds, should not be seen as a panic reaction to a worsening situation but rather a measured response from a grown-up sector determined to enact the lessons learned from the mistakes it made last time around.
In 2007-08, significant capital outflows and fire selling were the catalyst to precipitous asset value falls of around 50% over an 18-month period to June 2009. This was exacerbated by low relative cash holdings, which thankfully is less of a concern this time around, with some of the large open- ended funds holding close to record high levels of cash following a growing trend towards redemptions from Q1 onwards this year.
The period of uncertainty that we are currently entering should not be allowed to develop the same pandemic proportions. The backdrop is a solid one and by limiting redemptions, these funds are staving off the unnecessary need to fire sell and thereby avoiding a new and artificial low water mark for pricing.
Once the UK political landscape has settled down and the government’s post-Brexit economic stimulus has been deployed, these temporary fund closures can be removed gradually and pricing stability should return at a sensibly rebased level. Those with a bias towards a core income strategy should fare well during these challenging times.
The public may have delivered a surprise verdict on 23 June but we must have faith in the ability of our politicians to stabilise matters and even greater faith in the trajectory of our economic recovery, which can still continue, albeit perhaps at a more gradual pace.
This is a would-be crisis that can be prevented by a series of actions, one of which is managing open-ended funds cautiously for the benefit of all investors and we should applaud the responsible approach of our industry colleagues rather than cede to yet more sensationalist journalism.
Author: Rupert Sheldon, Palmer Capital