UK Open-ended Property Fund Suspensions: 'Here We Are Again'

The £501m Kames Property Income fund, the £2bn Janus Henderson UK Property PAIF and the £444m Aviva UK Property Income fund have so far been suspended, with all open-ended property funds "almost certain" to have to suspend dealing, according to Ryan Hughes, head of active portfolios at AJ Bell.

Update: Aviva latest to suspend property fund; 'almost certain' all will follow

On this occasion, the suspensions have been caused by an inability for the main valuers of property to accurately value properties, which Adrian Lowcock, head of personal investing at Willis Owen, should lead investors to "expect more fund suspensions over the next 24 hours and through this week".

Rebecca O'Keeffe, head of investment at interactive investor, noted that only a few months following the M&G suspension and four years after the mass suspensions in the wake of the Brexit referendum, we are in the same place once again.

"Here we are again. Dramatic market falls will put pressure on open-ended funds which invest in illiquid assets and yet again this shines a light on the issue of liquidity and the structure of funds.

"No structure is perfect, but the closed-ended structure of investment trusts is far superior when it comes to investing in illiquid assets such as commercial property."

The FCA announced rules in 2019 forcing a fund to suspend if there was material uncertainty over pricing of at least 20% of assets, and with two independent valuers now admitting an inability to accurately determine value. Hughes believes it is "almost certain that all open-ended property funds will now have to suspend dealing".

He added: "With the FCA continuing to look at the appropriateness of illiquid assets in daily traded funds, surely this must spell the end of such structures to avoid damaging the confidence of investors in the funds industry."

Record £2.2bn pulled from UK property funds in 2019

When approached for comment, a Columbia Threadneedle Investments spokesperson said: "We are currently reviewing the status of our Threadneedle UK PAIF valuations and will update clients as appropriate if necessary."

Since this comment, the firm has announced the suspension of the Threadneedle UK Property Authorised Investment Fund (PAIF) and its feeder fund.

Gerry Frewin, fund manager of the Threadneedle UK PAIF, said:  "Our objective is to protect the interests of investors in the fund, by always ensuring the fair treatment of all investors, whether they are transacting now or investing for the longer-term.

"While we appreciate this may cause some inconvenience, our decision to suspend dealing will prevent any investors being disadvantaged as a result of those redeeming from the fund or investing new money into the fund at an inaccurate price. Consistent with FCA guidance, we believe this is an appropriate measure to take to manage the fund during this period of exceptional uncertainty.

"We thank our investors for their patience and will continue to provide updates to keep them informed."   

Darius McDermott, managing director of FundCalibre, noted that due to the past issues in the sector, any investors who would be made "uncomfortable" by the suspensions should have left the asset class by now.

He added that the issues pertain to unprecedented valuing issues rather than redemptions or liquidity, which affect closed-ended funds as well.

"It will reignite the debate about what structure property funds should have - open or close-ended. But investment trusts will have the same valuation issues. Investors will still be able to trade their shares but are likely to suffer huge discounts if they do so.

"The discounts to NAVs within the UK commercial property trust sector, for example, have widened dramatically, with some as large as 50% in some cases. [at the time of writing, BMO Commercial Property Trust was trading at a 53% discount].

"I think investors need to remember that property - in whatever structure - is a long-term investment and not panic."

Paul Richards, managing director of the Association of Real Estate Funds, said: "Investing in UK property is an investment in hotels, offices, shops, warehouses, and restaurants up and down the country.

"COVID-19 is causing great economic uncertainty, hitting all of these businesses, and also reducing the number of investment transactions which provide evidence for property valuations. This means that valuers can no longer assess the value of properties with a high degree of certainty.

"Under these conditions property funds need to suspend while this extraordinary situation lasts, in order to ensure that investors, mostly long-term pension savers, are protected. Strict FCA regulations apply, in order to ensure that all investors are treated fairly."

When approached regarding the recent suspensions a spokesperson for Royal London Asset Management said:

"We are reviewing this and speaking to the regulator about this. Unless there are any regulatory requirements to do so, we don't currently have any plans to close our property funds. 

"The Royal London Property Fund operates monthly dealing and pricing and its clients are long term institutional investors, such as pension funds, who are able to take a long term view on their investments."

Canada Life Investments declined to comment.

The latest to fall is BMO GAM's UK Property fund and Property Growth & Income fund, along with their feeder funds, about which a spokesperson said:

"BMO Global Asset Management (BMO GAM) can confirm it has taken the decision to suspend dealing in both the BMO UK Property Fund and the BMO Property Growth & Income Fund (and their feeder funds), following material uncertainty being declared by the standing independent valuers in relation to the underlying assets in both portfolios to reflect the unprecedented ramifications of the global Covid-19 outbreak.

"The suspension is consistent with the FCA's rules under COLL 7.2 and its Policy Statement 19/24, which require that funds should suspend trading of units if material uncertainty is applied to more than 20% of a  fund's immovable assets. The decision to suspend dealing in the Funds (and their Feeder Funds), in line with the FCA's requirements, is designed to protect their investor base by restricting trades in units where uncertainty over the valuation basis could result in potential unfair treatment of investors.

"The suspension is not related to any liquidity event concerning either Fund. We do not know at this point when dealing will resume, but we will review the continuation of the suspension on an ongoing basis."

Both the £1.7bn Standard Life Investment UK Real Estate fund and £1.1bn Aberdeen UK Property fund, as well as their relevant feeder funds, have since been suspended due to the "extreme difficulty in accurately valuing assets in the current environment" according to an Aberdeen Standard Investment spokesperson.

They added: "Following the introduction of "material uncertainty" clauses into valuations by UK property fund industry valuers, we have suspended dealing in our two open ended UK property funds and their feeder funds. Markets around the world have experienced huge disruption as COVID-19 spreads and trading in the UK property market is being severely impacted. As a result, the Funds' Independent Valuers have informed us it is not currently possible to provide accurate and reliable valuations for certain assets, including the properties held in the Funds. We are therefore unable to produce a price for the Funds which we can say with any confidence reflects the true value of the assets.

"This action reflects the exceptional circumstances in global markets, including the UK property market as COVID-19 spreads, and the need to protect client interests by suspending trading when there is material uncertainty regarding how the assets should be valued. We will aim to lift the suspension as soon as confidence returns to the market and there is more certainty regarding asset valuations, taking into account the best interests of customers and investors. We will continue to keep everyone updated and thank them for their patience and understanding in these difficult times."

In relation to the suspension of the Janus Henderson UK Property PAIF and its feeder fund, a Janus Henderson spokesperson said: "The suspension is to safeguard the interests of our investors; the COVID-19 pandemic has created significant market uncertainty; this has led the independent property valuer (CBRE) to declare that there is material uncertainty of valuations in the UK property market; including those direct property assets owned by the Fund.

"Reviewing this material uncertainty in light of the FCA's incoming regulations on Illiquid Assets and Open-Ended Funds, which become effective in September 2020, we believe we need to protect the interests of all investors by suspending dealing in the Fund and the Feeder."

CEO of Hearthstone Investments Cedric Bucher said the firm's TM home investor fund was shielded from the fate of most direct property funds as a result of the "relatively high liquidity" of residential property compared to commercial assets.

He explained "There is not valuation uncertainty due to the residential property market being more liquid, even currently, and due to average unit size of a residential property being so much smaller (£250k for our fund vs £25m in mainstream commercial property funds).

"Also, residential property does not have specific challenges such as those faced by retail or leisure commercial property."

The precise wording of the material valuation uncertainty clause is as follows:

"The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a "Global Pandemic" on the 11th March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.

Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value.  Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement. 

Our valuation(s) is / are therefore reported on the basis of ‘material valuation uncertainty' as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty - and a higher degree of caution - should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of [this property] under frequent review."