Aviva said in a note to investors that dealing in the £1.8 billion Aviva Investors Property Trust was “temporarily suspended” at midday on July 4 because of “higher than usual volumes of requests to sell units”. In a separate statement the group cited the “extraordinary market circumstances” affecting the wider industry following the UK’s vote to leave the EU.
The move comes a day after Standard Life said it had locked investors into its £2.9 billion UK Real Estate Fund in response to retail investors looking to pull money, highlighting concerns about the wider property investment market.
Half of the 10 largest unlisted UK property funds had already taken action to adjust their fund prices down by between 4% and 6% since the results of the EU referendum had been announced, according to research by FN.
The Bank of England underlined its concerns over UK commercial real estate market in its Financial Stability Report on July 5. The Financial Policy Committee stated commercial real estate as the second most important channel that could increase risks to financial stability after the UK’s EU referendum. Bank of England Governor Mark Carney said some of these risks had begun to “crystallise”.
At a press conference to coincide with the stability’s report, Carney, said: “We have highlighted issues around commercial property for some time. There is a liquidity mismatch around the structures and mechanisms to manage outflows.”
Standard Life’s move helped push both the pound and London shares down in the morning, although the Bank of England’s statement generated a rally. As of 1330 the FTSE-100 was flat and the FTSE-250 down about 2.9% on the day.
Industry experts had warned that other fund managers could follow Standard Life’s lead if investor sentiment remained jittery. According to the Investment Association’s retail fund sales figures for May, property was the second-worst hit sector with outflows of £360 million. Figures for June are not available yet.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “If Standard Life is seeing outflows then and the Investment Association reported outflows, it stands to reason that other funds in the sector are going to see similar pressures. It would not surprise me if similar firms take similar actions in the coming weeks.”
The Aviva and Standard Life funds had cash positions – which can be used to meet redemption requests – of 9.3% and 13.1%, respectively. According to funds’ respective factsheets, available online, the cash positions of the 10 largest unlisted UK property funds range from 32.36% down to 0%.
Robert Duncan, a property analyst at stockbrokers Numis, said: “There is clearly fear that prices tomorrow will be substantially lower than pricing today. Discounting becomes built into people’s’ mindset and that creates quite a negative downdraft.”
The Bank of England report said the sector had experienced particularly strong inflows of capital from overseas over recent years. Some 45% of all transactions since 2009 had been made with foreign capital.
However, it noted: “Valuations in some segments of the market, notably the prime London market, had become stretched. Foreign inflows of capital to the UK commercial real estate market fell by almost 50% in the first quarter of 2016. More recently, share prices of real estate investment trusts have fallen sharply, reflecting the risk of future marked adjustments in commercial real estate prices.”
Amin Rajan, chief executive of asset management consultancy and research house Create-Research, predicted that Standard Life’s decision to suspend redemptions would not be an “isolated incident”. He added: “Asset managers will be forced to suspend funds in order to preempt heavy losses.”
The Investment Association said in a statement that suspensions protected investors from being forced sellers of assets and damaging the interests of investors who remained inside the funds.
It said: “Suspension is a mechanism that is laid out under stringent FCA regulations, and when it is employed by one of our members, it shows that the regulations are working as they are supposed to.”
Additional reporting by Bernard Goyder and Mark Cobley