Rarely has property dominated newspaper front pages and rolling TV news bulletins in quite the way it has done this week. And it has all been a little overblown.
But it serves to highlight a number of structural issues which have been ducked before and need addressing.
If the preceding week had been a defining one for the country, this week has been a significant one for this sector. Within days of Brexit, most open-ended UK retail real estate funds reduced the pricing of the units in their funds to discourage redemptions. Some switched to weekly rather than monthly valuations. But it wasn’t enough.
This week six fund managers – Standard Life, Aviva, M&G, Henderson, Threadneedle Columbia and Canada Life – closed their property funds to redemptions. On Wednesday a seventh – Aberdeen – slashed the pricing of its fund by 17%.
From the BBC to The Guardian to the financial press, each step was reported in Doomsday detail.
But we have been here before. A PwC report commissioned by the Association of Real Estate Funds in 2012 found that “the detailed workings of the timing and pricing of subscription and redemption are so fundamental to the model that a lack of transparency and lack of understanding among investors has the potential to cause lasting damage”.
Mike Prew, managing director and analyst at Jefferies, put it more succinctly: “The issue you have is that you have got a model here which takes liquid cash and puts it into illiquid assets. It works well when you have inflows when you have a rising market and is a one-way escalator of investment but the trouble is when the escalator goes into reverse.”
Four years ago its predecessor body ducked the call to review the legislation that regulates open-ended retail property funds. The Financial Conduct Authority should not make the same mistake.
• What the fund redemption closures served to highlight – and why the broadcast media especially latched on to the story – is that it adds to post-Brexit negative sentiment and could be an early indicator that we are headed recessionwards.
For the reasons outlined above, it is no such sign, though in a market starved of certainty right now the risk of misinterpretation is high.
What we must not do is talk ourselves into a slowdown. Indeed the funds’ decision to close should be seen as a positive. It should reduce the need for fire sales, which the Bank of England this week warned was a risk to the UK’s financial stability.
In a week where everyone has sought to interpret, speculate and forecast, comments from three REIT chief executives that may indicate the months ahead.
“If Brexit was Bear Stearns, what could be Lehman’s?” (Next year’s German federal and French presidential elections, he suggested.)
“I have told my team that there is no longer a risk that the next couple of years are going to be boring. We are going to make a [expletive redacted] load of money.”
“We thought there was going to be a correction, it has just come sooner and sharper than we expected.”
All agreed that there has been a sudden shift in the balance of power from borrower to lender and from landlord to tenant. And ultimately it is the latter that will determine the health of this sector and of the economy at large.
The government – when we have a functioning one again – should use its levers to stimulate the economy. The Bank of England – and we should probably be thankful that these days Mark Carney is running the economy in all but name – should intervene to shore up confidence. And overseas investors should be encouraged to take advantage of the currency play and see the next 12 months as a buying opportunity.
So let’s not overreact: many forecasters, including Capital Economics, have only made modest adjustments to rental and capital value forecasts despite the turmoil. Occupier confidence is all.
• To send feedback, email damian.wild@estatesgazette.com or tweet @DamianWild or @estatesgazette
