Aberdeen Standard Investments and BMO have joined five other firms who have suspended their property funds after independent valuers introduced material valuation uncertainty clauses due to the coronavirus outbreak.
The UK commercial property market is facing unprecedented challenges brought on by the pandemic. Valuation firms are now saying that they can no longer make reliable judgments on valuation because of the dramatic market falls.
L&G followed Aviva Investors, which gated its fund this morning, after its independent valuer Knight Frank introduced a material uncertainty clause due to market volatility. Knight Frank also values M&G Investments, which suspended its fund in December.
L&G said it was a temporary measure and will continue to review the suspension “which will remain in place until these extreme conditions stabilise and the uncertainty clauses are removed.”
Columbia Threadneedle joined Janus Henderson and Kames Capital after their independent valuer, CBRE, also introduced the uncertainty clause.
“The warning signs were there”
Property fund liquidity has suffered since the Brexit referendum in 2016 as property values plummeted. The suspension of M&G’s property fund was the first warning sign that liquidity was a growing issue.
James McManus, chief investment officer of investment manager Nutmeg, said: “The warning signs for property fund liquidity have been half a decade in the making”.
“These underlying investments simply do not have the daily liquidity that they are being advertised with, and the managers of these funds are misleading investors on this promise.”
Ryan Hughes, active portfolio manager at AJ Bell, also said the news came as little surprise.
“With independent valuers finding it impossible to accurately value property given the major economic uncertainty, there is little choice but to suspend dealing.”
Coronavirus hits funds
The coronavirus-related market volatility in recent weeks, paired with an ailing British high street, will have done little to quell nerves. McManus said the “starvation of activity brought on by enforced quarantines may be the straw to break the camel’s back.”
Investment in UK property is also an investment in hotels, offices and shops which have been hit particularly hard by the outbreak of coronavirus. Prime Minister Boris Johnson this week urged Brits to avoid pubs and restaurants as he sought to enforce “social distancing” measures amid the outbreak.
As uncertainty hits these sectors it reduces the number of investment transactions, which provide evidence for property valuations. Paul Richards, managing director of the Association of Real Estate Funds (AREF) said: “Under these conditions property funds need to suspend while this extraordinary situation lasts, in order to ensure that investors, mostly long-term pension savers, are protected.”
New rules imposed by the Financial Conduct Authority (FCA) force the suspension of a fund where there is material uncertainty overpricing of at least 20 per cent. The rules come into effect in September but most asset managers have adopted the measures in the face of economic turmoil, according to AJ Bell’s Hughes.
“With M&G Property Portfolio having been suspended since December last year, it raises serious questions about whether we’ll see a chain-reaction effect and see other property funds suspending. This further reinforces the need for the FCA to make material changes to the daily pricing structure of property funds given the challenges that exist in the market when major uncertainty strikes.”