Commercial real estate appears to be a victim of the recent Brexit vote that has left over $20-billion (U.S.) trapped in funds that not long ago promised investors a slice of London’s red-hot property market. The reason behind the outflow wave? Fears that economic uncertainty after Britain’s decision to exit the EU will hit demand from companies to rent and buy commercial property.
Normally, most funds allow investors to pull out their money daily. But when redemption requests balloon, as they did last week, funds may run out of cash and must then sell the buildings they own. That process can take months. “Property is an illiquid asset and this week shows what can happen to illiquid assets when the fundamentals/facts change,” Deutsche Bank reminded clients.
Many property investors will also remember the 2008 crisis when funds hit by huge redemptions were forced into a fire sale of commercial buildings, eventually bringing central London property prices down by as much as 40 per cent.
Fund suspensions aim to avert this scenario by giving the asset managers more time to sell property.Some managers such as Legal & General and F&C have resorted to less extreme measures such as reassessing the value of the fund to account for likely changes in market pricing even if sales data has yet to justify the figure. That means anyone who wants money back must accept a lower price than was established the last time the property portfolio was formally valued – essentially an incentive to leave cash in the fund.
One thing has changed since the last crisis – the amount of money involved is far higher, exacerbated by shifts in the global investment landscape. British property markets along with other business hot spots such as New York and Singapore have seen a huge influx of cash from investors – domestic and foreign – seeking to escape crushingly low or even negative yields on bond markets.An investment in real estate on the other hand offered deep-pocketed money managers, such as sovereign wealth funds (SWF) or insurance firms, the promise of an asset that would hopefully appreciate in value while also providing handsome rental income.
Source: The Globe and Mail