Net outflows from UK real estate funds in June were greater than in April and May combined.
Investors are quickening the pace at which they pull money from UK property funds, with greater withdrawals in June than in the previous two months combined.
Net outflows from property funds last month stood at £105m, compared to outflows of £45.9m in May and £59m in April, according to analysis by funds transactions network Calastone.
June marked the ninth consecutive month of net outflows from property funds, and took the total pulled from funds since last October to almost £1.4bn. April and May had been notable for a slowing in the rate of redemptions, but Edward Glyn, Calastone’s head of global markets, said those “brief glimmers of light… are now dimming”.
The pressure is on
“Increasing anxiety over the UK’s political situation, and growing fears that it is heading for a no-deal Brexit are once again prompting new investors to shy away from real estate funds, and existing holders to ask for their money back,” Glyn said.
“April and May gave fund managers some respite to review their liquidity positions, but as redemptions once again ratchet up, the pressure is back on and regulators are watching closely.”
The rise in withdrawals will be taken as a further sign that funds investing in UK property will take the drastic measure of stopping investors from withdrawing their money.
That would risk a repeat of events after the Brexit referendum in 2016. Then, several funds stopped investors from taking their money out while they attempted to sell properties quickly enough to free up cash.
M&G Real Estate has already restricted investors in its UK property fund from making withdrawals, although a spokeswoman for the fund house said that the decision to defer redemptions from its fund, which targets institutional rather than retail investors, was “completely unrelated to Brexit”. Instead, she added, the rise in redemption was due to long-term investors such as pension funds de-risking their holdings.
Rating agency Fitch warned earlier this year that the risk of UK property funds prohibiting withdrawals was growing, and that a no-deal Brexit would likely see outflows pick up pace even faster than after the 2016 referendum.
At the time, Fitch’s analysts said: “Open-ended property funds have a history of imposing extraordinary liquidity management tools such as gating to prohibit withdrawals, and we doubt that the UK property fund sector could withstand severe redemption pressure without applying such measures.”
Fund suspension
Fund withdrawals have been back in the spotlight due to problems at a fund overseen by high-profile stockpicker Neil Woodford, who in June gated a £3.6bn fund due to a rise in redemptions following an extended period of underperformance.
In the aftermath of Woodford’s fund suspension, the Financial Conduct Authority delayed the publication of a long-awaited report into proposed changes for how funds investing in illiquid assets, like property, manage redemptions.
The watchdog had launched a consultation after the run of suspended funds in 2016, closing the consultation in January this year. A final report had been expected before the end of June but was pushed back.
Regulator’s suggestions
The FCA’s initial consultation paper included several suggestions for funds investing in hard-to-sell assets, including requiring them to shutter their funds if there is “material uncertainty” about more than 20% of the portfolio.
In its annual report, published in July, the FCA said: “We are considering the feedback to these proposals and will also take into account the lessons learned from the Woodford fund when finalising the new rules.”
The FCA had not responded to a request on the timing of the report by publication.
