Frozen funds raise concern

British open-ended property funds are the latest to feel the impact of Brexit and there are fears that Kiwi investors could be exposed to some of the fallout.

Friday, July 8th 2016, 6:00AM

by Susan Edmunds

Six UK property funds have now been frozen – meaning half of Britain’s £25 billion property fund sector is at a standstill.

The open-ended real estate funds involved, including Aviva, M&G Investments and Standard Life, are not as liquid as listed property options.

It can take significant amounts of time to sell properties to meet withdrawal requirements.

While open-ended funds tend to hold a stock of cash to help, in a worst-case scenario they could be forced to sell their properties in a falling market to keep up with investor demand.

Outflows had already started before the vote result was announced.

John Berry, of Pathfinder Asset Management, said so far New Zealanders’ exposure to the downturn was limited. Most New Zealanders with exposure to British property would be invested in listed property, he said, where the price might suffer but the investment was not generally at risk.

But he said when unlisted funds were freezing, investors might get nervous and that could wash over to the listed property sector as well. “When you look at the size of these funds and the amount that is locked up, that’s a lot of savers’ money.”

Uncertainty could flow through the economy as companies chose to invest in Europe instead of the UK, he said, which could affect the value of New Zealanders’ holdings in UK equities.

Berry said Pathfinder had a low allocation to the UK in its global property fund and had been currency hedging as a precaution.

Brian Gaynor, of Milford Asset Management, said the problems with the funds indicated a mismatch between the investors in them and the type of funds they were.

He said the funds were used by both retail investors and institutional investors but they were not suitable for individuals.

“With our fund, we can sell Fletcher Building shares, BHP shares, Westpac shares … but you can’t just sell a big commercial property in the space of a few days.”

He said there were likely a lot of European retail investors in the funds who would not otherwise be able to buy British commercial property. When the British currency started to drop, it would have added to their urgency to bail out.

Gaynor said New Zealand investors should not be troubled by the Brexit fallout in general. He said there would be pockets of problems but the property funds’ situation was not a sign of a wider systemic collapse.

Tags: Brexit property investment