LONDON (Reuters) - The number of British property funds suspended after the country’s vote to leave the EU more than doubled on Wednesday, leaving over 18 billion pounds frozen in the biggest seizing up of investment funds since the 2008 financial crisis.
Seven funds have pulled down the shutters after a wave of investors asked for their money back amid speculation about a possible drop in commercial property prices in reaction to the result of the June 23 referendum.
That in turn has raised concerns about the outlook for the broader financial system, given the risk of investors bailing out of other asset classes in a panic and of lenders to the sector such as banks suffering fresh balance sheet stress.
Henderson Global Investors, part of Henderson Group HGGH.L, said on Wednesday it had temporarily suspended trading in its 3.9 billion pound UK Property PAIF and PAIF feeder funds due to "exceptional liquidity pressures" given uncertainty after the Brexit vote and the other suspensions.
It was followed within the hour by Columbia Threadneedle, part of the Ameriprise Group AMP.N, which said it had suspended trading in its Threadneedle UK Property Fund.
Canada Life said it had also suspended its Canlife Property and Canlife UK property funds, describing this as a deferral of requests to withdraw investments. “The deferral can be for up to six months, enabling the funds to ensure property values reflect market conditions,” it said in a statement.
Late on Wednesday, Aberdeen Asset Management ADN.L said withdrawals from its 3.2 billion pound UK Property Fund which it had received before 1100 GMT would face a 17 percent dilution levy, and that it would not fulfil later orders. It expected to re-open the fund at 1200 London time on Thursday.
BlackRock Inc BLK.N, the world's largest asset manager, on Friday told investors that it raised quarterly redemption charges on its 3.3 billion pounds BlackRock UK Property Fund to 5.75 percent, from 2 percent.
"Over half of the property fund sector is now on ice, and will remain so until managers raise enough cash to meet redemptions. To do that they need to sell properties, and as any homeowner knows, that is not a quick or painless procedure," said Laith Khalaf, senior analyst at fund supermarket Hargreaves Lansdown HRGV.L.
“These funds are therefore likely to be closed for weeks and months rather than simply a matter of days,” he wrote in a note to clients before Aberdeen’s announcement.
Britain’s Financial Ombudsman Service said it had begun to receive calls from retail investors worried about the closures and the potential hit to their savings. “Although the decision to suspend redemptions was expected, the extent of the suspensions by the three funds so far is quite troubling,” a spokeswoman said shortly before Wednesday’s fund announcements.
Keenan Vyas, Director in the Real Estate Advisory Group at Duff & Phelps in London, said the consequences could be profound.
“If there continues to be a tremendous amount of redemption pressure in a short period of time this could result in a large number of sales transacting below book value and an eventual overall correction in property asset pricing across the UK market,” said Vyas.
Despite concern that the banking system - beset for years by toughening capital constraints and misconduct fines - could face a fresh hit from any write-down in commercial property, analysts were generally sanguine as total exposure was light.
“Banks haven’t really played the asset class in the last five years - it’s mostly been the shadow banking sector,” said analysts at Bernstein in a note.
British banks held about 90 billion pounds of the 183 billion pound commercial property loan market at the end of 2015, according to research by De Montfort University.
RBS RBS.L had the most exposure at 25 billion pounds or 5 percent of its assets, followed by Lloyds Banking Group LLOY.L with 18 billion (2 percent of assets) and Barclays at 11 billion (1 percent), according to Mediobanca Securities.
Officials said that banks are better placed than in 2008 to withstand falling real estate values, having reduced their overall exposure and increased capital reserves
“One of the things the PRA (Prudential Regulation Authority)has done over the years is to ensure that the exposure of UK banks to commercial property has been kept quite manageable... This is not a big issue for UK banks,” Bank of England Governor Mark Carney said on Tuesday.
Concerns that the UK upheaval could spread to Germany, Europe’s other big real estate investment market, were also overdone, with no increase in demand to redeem there, said managers at Deka and Union Investment, among others.
As well as being better diversified, with UK property making up no more than 20 percent of most German funds’ portfolios, retail investors are also prevented from getting their investments back for 12 months.
While UK funds still had daily dealing, the Financial Conduct Authority’s Chief Executive said he was keen to look again at the inherent liquidity mismatch given property is tough to sell quickly.
Britain’s fund trade body reiterated on Wednesday that the funds need to review their suspensions every month. “The manager and depositary are under a duty to ensure that the suspension is only allowed to continue as long as it is justified having regard to the interests of unit-holders,” it said.
Additional reporting by Huw Jones, Kathrin Jones, Lawrence White, Anjuli Davies, Trevor Hunnicutt and David Milliken; Editing by Rachel Armstrong, Mark Potter, David Stamp and Jane Merriman
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