At 3.39pm on July 5, after being hit by a wave of requests from investors wanting to cash out of the fund, Henderson said it had “temporarily suspended all trading … to safeguard the interests of all investors”. This followed similar moves from Standard Life, Aviva and M&G, the fund management arm of insurer Prudential.
The governing board of Henderson’s fund, the second-biggest property fund of its type in the UK, usually meets once a quarter; this week it has convened once a day. At least one executive had to dial in from the beach as the team authorised emergency revaluations, adjusted the fund’s price downwards, dealt with waves of redemptions and, finally, took the decision to impose a “gate” on investors wanting to redeem their stakes.
The fund, founded in 1999, owns property across the UK, usually with big-name tenants. Their properties range from an Eddie Stobart distribution centre in Merseyside, to the Odeon cinema in Kilmarnock, to 440 Strand, the headquarters of the Queen’s bankers, Coutts. Now, according to Phil Wagstaff, Henderson’s global head of distribution and a member of the fund’s board, the managers are working out which ones to sell: “If we can get fair prices, we will sell them. You have to sell a mix of properties that keep the portfolio in the same overall shape.”
In retrospect, the first few days after the UK’s vote on June 23 to leave the EU were the calm before the storm. The fund has a six-strong team including representatives from operations, finance, investment management, compliance and distribution, and is advised by the fund’s managers, Marcus Langlands Pearse and Ainslie McLennan. On the morning of June 24, after the vote result, an extraordinary meeting was convened and Wagstaff recalls: “At this time there weren’t any redemptions issues to discuss. Remember this is only on the morning of the 24th. The managers had built up a cash position in advance and were somewhat defensively positioned.”
One of the board’s duties is to protect investors. Amid the uncertainty it became one of the first property funds to put in an adjustment factor – in this case 5% – to reflect uncertainties in property valuations and ensure those cashing out in a panic didn’t erode the investments of those who stayed.
Wagstaff said: “No one else did it on that day. In the following week a number of others did it.”
Henderson’s property managers and executives reverted to a watching brief the first full week after the vote while keeping a careful eye on redemption requests from the fund. These weren’t running at unusual levels.
But on the morning of Monday, July 4, one of Henderson’s rivals – Standard Life Investments – announced it would suspend trading in its UK property fund. Wagstaff said: “If you are a retail funds adviser, and you have money in multiple property funds, and you cannot withdraw from one of them, you will look to withdraw from the others.
“It was obvious to us, and to everyone else, once people start to suspend there will be more redemptions. So we knew we could see a large amount of redemptions on Tuesday [July 5].”
Henderson convened another emergency meeting of its property fund board on July 4, and reconsidered the price of the fund and its cash position. It decided to keep the fund open to redemption requests for the time being, and see what happened on Tuesday.
Wagstaff said: “You have to be fair both to those who remain in the fund and those who leave. If you suspend too quickly, you are stopping people getting their money back, which isn’t fair. But if you suspend too late, you are leaving people in the fund with no cash buffer, which is not what they bought.”
Sure enough, on Tuesday, July 5, Henderson experienced an “abnormal” level of redemption requests – Wagstaff declined to give exact numbers, but said it was in the tens of millions of pounds. But this was still nowhere near enough to threaten the fund’s cash buffer. Wagstaff declined to provide precise figures, but as of the fund’s most recent publication date at May 31, its cash buffer stood at 14.3% of a £3.9 billion fund – over £500 million.
At a further board meeting convened on Tuesday, the firm decided the cash level was still “within the tolerance that we had communicated to our clients” – Henderson tries to keep its cash buffer above 10% at all times.
Wagstaff said: “Following the Standard Life decision, we still only had one data point – the redemption requests on Tuesday. But people have been assuming that you only suspend once you run out of cash – this absolutely isn’t the case.”
Wagstaff explained that the responsibility of a property manager in this situation is to suspend trading well before the cash buffer gets eroded to nothing; otherwise investors who remained in the fund might end up stuck with a portfolio of unsaleable property assets and no cash cushion whatever, which is not what they bought into.
He said: “It’s not that we can’t meet the redemption requests – we can. It’s to make sure that clients who stay are not disadvantaged.
“You don’t want to be holding a fire-sale of properties in order to get the cash back up.”
Events then moved on again. On Tuesday afternoon, two more of Henderson’s rivals, M&G and Aviva Investors, announced they too were suspending trading in their UK property funds. All, like Henderson’s, were open-ended funds which have an inbuilt issue in times of market stress: investors can demand their cash back at any time, but if the fund needs to sell properties to fund these requests it will take many weeks to sell a property.
Wagstaff said that after M&G and Aviva suspended their funds “we knew that this would cause a significant uptick in redemption requests, which have to be made by 12 noon each day. So we decided to reconvene at one o’clock on Wednesday, to see what the Wednesday morning redemptions were like, as our cash position had been reduced on Monday and Tuesday.”
By Wednesday, he said, “even more people had decided they wanted to redeem – Tuesday was high, Wednesday was higher. We took the view that the cash position was now below the 10% level we had set. So we felt we had no choice but to suspend trading.”
In the middle of the afternoon, the group issued a statement saying it had “temporarily suspended all trading in the Henderson UK Property PAIF and the Henderson UK Property PAIF Feeder Fund to safeguard the interests of all investors”.
During this period, Henderson’s client relations staff were working at the double, Wagstaff said: “No one was going home at the appointed time, put it that way. Everyone has been working extra hours.”
They were fielding requests from investors for updates on the fund’s cash position, and how many redemption requests it was receiving – but had to give out a lot of polite ‘nos’. Wagstaff said: “We are not at liberty to share these things, because either you tell everyone, or you tell no one. We were getting a lot of incoming from big clients, and we had everyone under instruction not to give out anything that wasn’t public.”
So what happens for Henderson’s property fund now – and all the others suspended this week? The procedure is fairly clear. Wagstaff said: “The suspension will be officially reviewed 28 days from now. The board, or a subset of it, will now meet every week to reconsider the fund’s fair-value price. We have moved the valuers on to weekly pricing as opposed to monthly, and a number of our peers have done the same thing.”
Unlike some rivals, Henderson is still taking redemption requests, which will build up until the fund resumes trading. When this happens, the redemption requests will be honoured all at once, so there is no “first in, first out” queue, and no benefit for getting a redemption request in early.
Getting ready to sell
The process of selling off properties from the fund begins now, Wagstaff said, but Henderson will take its time. Wagstaff said buyers can be found for UK properties, particularly overseas buyers attracted by the fall in the pound, so it should not be impossible to sell at appropriate prices.
The fund has relatively modest exposure to the central London market, which is generally reckoned to be most heated, although it does have a tilt to the south-east. The group’s single biggest investment is 440 Strand – the big yellow building that is home to Coutts – but it has a wide variety of retail, office parks and industrial/distribution buildings mostly let to big-name corporate clients.
And there are still buyers for UK property. On the same day Henderson suspended its fund, an auction of commercial property by property adviser Allsop saw plenty of lots snapped up at prices up to £2.4 million.
James Routledge, head of investment at property adviser Matthews & Goodman, said “there didn’t seem to be any sense of nervousness in the room”.
The problem is that seven large property funds have now suspended trading and are looking to sell to generate the cash needed to pay investors. Overseas buyers looking for quality assets, looking at factors such as yield, good location and long leases, can snap up modest numbers of properties – but too many “would swamp the auction”, Routledge said.
For this Henderson UK property fund, this is new territory. It has never suspended trading before, even during the financial crisis of 2007-8. However, Henderson does have a connection to the best-known real estate fund suspension from that era: in 2010, the company acquired troubled fund manager New Star Asset Management, which had suspended its international property fund in November 2008.
How long will investors be locked in this time? Henderson’s Wagstaff said: “We will need to be comfortable that the level of cash on re-opening the fund would cover the redemption requests we have at the time, and allow a buffer for further liquidity of around 15% to 20%. Whether this is in 28 days, or a further 28 days after that is difficult to say at this point.”
Wagstaff reckons: “I am not sure the political situation, and therefore the issue around London property valuations, will be resolved in the next 28 days. What has been driving people to redeem are the political issues around the terms of Brexit, and until that’s resolved, I think it’s unlikely we will see any quick resolution of the suspensions.”
Olga Cotaga of the Wall Street Journal contributed to this article