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Frozen UK property funds face existential crisis

Tue 26th May, 2020 8:00am
* Ten big retail funds tracked by Morningstar have suspended
    * 20/29 funds in MSCI/AREF institutional index delayed
payments
    * Funds seen shut until Sept due to valuation difficulties
    * Funds could lessen redemption frequency - Fitch

    By Carolyn Cohn
    LONDON, May 26 (Reuters) - British property funds are set to
remain frozen for months as the market is impossible to value
due to the coronavirus crisis, and some may need to change
structure to survive, industry sources say.
    Ten big open-ended property funds tracked by Morningstar,
with a total of 6.5 billion pounds ($8 billion) under
management, stopped investors from getting their money out in
mid March, saying valuers could not accurately assess real
estate assets in a plunging economy.  urn:newsml:reuters.com:*:nL8N2BA8JY  urn:newsml:reuters.com:*:nL8N2BB5BL
    With question marks over the future of office working, the
retail industry in crisis and the housing market only just
reopening, the price of property is set for a major
readjustment, but a dearth of transactions means the scale of
change is still unclear.
    "This is a crisis unlike any other," said Ben Sanderson, a
director at Hermes Real Estate Investment Management
    "In the short term, it's going to be hugely challenging."
    Many of the Morningstar-tracked funds are aimed at retail
investors who could take their money out daily, managed by
household names like Aviva  AV.L  and Legal & General  LGEN.L .
    Such funds also suspended during the 2008/09 financial
crisis and after the 2016 Brexit vote because their hard-to-sell
assets meant they could not meet daily redemption requests.
    But this crisis has extended further into the 70 billion
pound UK property fund sector.
    For the first time, funds aimed at institutional investors
like charities and pension funds have also locked their doors.
    These funds typically only allow redemptions monthly or
quarterly. 
    Twenty of the 29 institutional-focused funds in the
MSCI/AREF UK All Balanced Property Fund Index have suspended or
deferred redemption payments, according to a Reuters survey,
including funds managed by BlackRock  BLK.N , Federated Hermes
 FHI.N , Savills and Schroders  SDR.L . 
    Three with different structures have remained open and six
did not respond to requests for comment.   
    
    CONFIDENCE DAMAGED
    Industry sources said it was unlikely funds would unfreeze
before September, and what happens then is unclear.
    Suspensions enable funds to treat customers equally,
preventing a rush for the exits which means slow movers get a
lower price for their investments.    
    The funds say these suspensions are related to valuation
problems and, unusually, do not follow a flood of redemption
requests.
    However, Morningstar data shows 126 million pounds left the
top funds it tracks in the first half of March before they
suspended, compared with 103 million for the whole of February
and 43 million in January.
    Investors may flee once funds reopen.
    "Suspensions damage the confidence of investors," said Ryan
Hughes, head of active portfolios at investment platform AJ
Bell.
    Retail funds say they have high levels of cash, helping them
cope with any redemptions. 
    Institutional funds say their investors take a long view,
and will continue to favour real estate for diversification and
yield.
    But for those funds which do need to sell assets to raise
cash, it will be difficult.
    Jessica Berney, manager of the 2.6 billion pound Schroder UK
Real Estate Fund, said the fund had completed three large
transactions since the virus outbreak, but there have been no
new deals in the market since then.
    Buyers are waiting - Ronald Dickerman, president of U.S.
property investor Madison, said the firm would like to "provide
liquidity" to the funds' investors - but sources say any sales
would likely be at discounted prices.
    Funds could close if they cannot meet redemption requests.
Veteran UK investor Neil Woodford's equity income fund suspended
trading last June before closing in October.
    To avoid future suspensions, funds may change structure.
    Alastair Sewell, senior director, fund and asset management
at ratings agency Fitch, said regulatory pressure could see
funds follow peers in countries like Finland or Germany, where
real estate investors must hold investments for anything from
three months to two years.
    Funds could also become investment trusts, which contain a
fixed number of units.
    ($1 = 0.8177 pounds)

 (Reporting by Carolyn Cohn; Editing by Mark Potter)
 ((carolyn.cohn@thomsonreuters.com; 44 207 542 6320; Reuters
Messaging: carolyn.cohn.thomsonreuters.com@reuters.net))
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