Brexit Update – UK Commercial Property

 July 5, 2016
 

Principally as a result of the vote for the UK to leave the EU, UK commercial property values have been downgraded, which has led to some institutional and private investors switching out of the asset class. Consequently, Standard Life Investments have decided to suspend trading on all share classes of the Standard Life Investments UK Real Estate Fund (and associated feeder funds).

Unlike investing in equities, the selling process for property can be lengthy. The Fund Manager needs to offer assets for sale, find prospective buyers, secure the best price on behalf of the Fund’s investors and complete the legal transaction. Unless this selling process is controlled, there is a risk that the Fund Manager will not achieve the best deal for investors in the Fund, including those who intend to remain invested over the medium to long-term.

As a result of the suspension, no new money can be invested into the fund and no withdrawals can be made. Standard Life have said they would remove the suspension “as soon as practicable”, and that it will be formally reviewed every 28 days.

The reason they have felt the need to do this is fundamentally a liquidity issue. The fund’s management is concerned about the impact it would have on existing investors if they had to start selling properties to meet redemption requests. The fund is “open-ended” with daily liquidity, but property is not an asset that can be traded on a daily basis. Therefore, property funds such as this do sometimes have to impose suspensions. This liquidity issue is the reason we have capped exposure to property funds.

Up until now, Standard Life Investments have been using cash balances to meet redemption requests. The fund still has a residual cash balance equal to 7% of the fund, but do not want the cash element to be depleted any further, to maintain liquidity.

This action is therefore largely a cautionary move, designed to protect existing investors. The Fund  yields 3.86% per annum (distribution yield) and we would recommend continuing to hold an element of UK commercial property within our diversified portfolios.

Investors taking regular withdrawals from their portfolio will need to spread the withdrawals across the balance of their portfolio, whilst those making regular investments will be investing in the fund’s Client Money Receipts Account until the suspension is lifted.

It is important to view portfolio returns overall and a diversified investment portfolio has proved to be resistant to falls in UK domestic equity markets.

We will keep you updated, but please get in touch if you have any concerns. The referendum result was only 10 days ago and the longer term impact is still unclear as the situation is so fluid.