In the midst of the Covid-19 driven sell offs we saw in March, a number of the major UK property funds were left with no choice but to suspend due to turbulent market conditions. It is now July, and despite a steady return to normal, to date only one of those funds has re-opened. So what’s happening?
Although volatility has largely subsided, markets still appear correlated to the virus and thus it is likely that until a vaccine is formulated, we can expect the uncertainty to continue. As property funds are generally less liquid by nature, there is the possibility of managers being left unable to meet redemptions if we see further sell offs. The suspension of trading, or gating as it’s also known, is put into place to protect all investors in the event of liquidity issues. The manager can take their time to re-position the portfolio, and find buyers for assets at prices which are more protective of investor capital.
It is also important to understand that many property funds have large exposures to direct property through the ownership of physical buildings. These properties become extremely difficult to accurately value in times of such market uncertainty and as such, the true value of the fund cannot be known. The Financial Conduct Authority recognised this problem in 2019 and announced that as of autumn 2020, any fund with material uncertainty over at least 20% of it’s assets will be forced to suspend trading. Clearly this is a signal of the ongoing troubles that many property funds are facing.
The ‘death of the high street’ has long plagued the sector, and many managers will not own retail assets as a result. The continued rise of e-commerce has seen many former shopping staples go into administration over the years. The lockdown measures appear to have accelerated this trend with many retailers suffering the same fate throughout the first seven months of the year.
Retail is not the only area which is vulnerable to advancements in technology. Many of us continue to play a part in the nationwide experiment of working from home. All of the misconceptions around low productivity, employer scrutiny and morale have been somewhat turned on their head. Many employers now talk of allowing permanent working from home, downsizing their offices, or even giving up leases altogether. Will video meetings replace face to face meetings? Could these changes be another blow to the UK property sector?
So when are we likely to see the re-opening of these funds? At this point, it really is impossible to say. As discussed earlier, much of the market uncertainty and investor nervousness is directly linked to Covid-19. If and when we see a vaccine, sentiment may begin to return, and funds will be able to slowly re-open. However, the 31st December Brexit deadline looms large on the horizon and this could bring with it a whole new raft of challenges.
At the tail end of 2019, BAM took the decision to exit the sector completely due to our concerns over liquidity and the future of UK property. The events of recent months, and the outlook moving forward has only served to reinforce our views.