Over the past week or so, the boards of a number of UK property mutual funds have exercised the ability their charters give them to suspend shareholder redemptions.
What’s this all about?
The central issue is, of course, the “Leave” result of the Brexit vote. This has two negative consequences for UK property. The first is that property is a domestic sector, where holders whose base currency is the US$ or the € have felt the full brunt of the subsequent fall in sterling against those currencies. The second is that although suddenly 12% cheaper to foreigners, it’s questionable whether offices or other commercial properties will retain their allure once the UK is on the outside of the EU. Also, the central bank is predicting the vote will cause a mild recession, always a bad thing for property. So bargain hunters haven’t yet appeared as buyers.
On balance, a lot of people want to cash their shares in.
The second problem is endemic to property. It’s not a particularly liquid sector. Not only would you get a horrible price in a forced quick sale, it’s probably impossible to get the paperwork processed and a check in hand inside, say, a month. Property funds–in fact, all mutual funds–try to safeguard against being overwhelmed by redemptions by keeping a percentage of assets (maybe 2% or 3%) in cash. Funds also have credit lines they can draw against if need be. But for property funds if holders of 10% of the outstanding shares all want to redeem at once that won’t be enough.
Initial redemptions can also create a self-reinforcing cycle. Shareholders who initially had no intention to redeem may join the queue simply because they fear continuing withdrawal pressure will depress net asset value further.
The result is that the funds in question have been unable to meet the redemptions they’re experiencing. They’ve been forced to suspend redemptions while they raise cash in a orderly way.
I don’t think the redemption window will be opening any time soon, although I’d imagine enterprising brokers have already set up a market to transact in these suspended shares, at a substantial discount to NAV, no doubt.
Lessons for the US? More tomorrow.