Trading in the majority of the UK’s £25 billion commercial property fund sector has been suspended – meaning investors can neither put money into funds, nor take it out.
Here, we walk you through what this means, what you can do, and why it’s not a reason to panic.
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The affected funds
At the time of writing, the affected funds include those from Aviva, Standard Life, Henderson Global Investors, Columbia Threadneedle, Canada Life and M&G.
Most recently, Prudential has suspended six other funds that have money invested in the Aviva or M&G funds.
Instead of stopping all trading, other fund houses have opted to slash their unit prices (similar to share price but used by open-ended funds where new units can be created or destroyed as they are bought or sold).
Aberdeen has slashed the unit price of its commercial property fund by 17%, Legal & General by 15%, and F&C by 5%. This won’t stop investors from trading but will discourage it – if you were to cash in your units now you would do so at a considerable discount.
Find out more: Commercial property – types of funds
Why is this happening?
Although investors may be put off by not being able to withdraw their money, this action is not necessarily against their interests.
Following the Brexit vote, the United Kingdom has entered a period of economic uncertainty.
Given the uncertain economic outlook, investors have been pulling out of commercial property – the thinking goes that if jobs leave the UK, office space will become cheaper and therefore commercial property prices will fall.
But as anyone who has sold a house will know, property can take a long time to sell. In contrast, most stocks and shares are very ‘liquid’ – meaning you can always find a buyer even if the share price is low.
Instead of owning shares, some open-ended property funds own actual, physical buildings and office space. This means that if enough people want to cash-in their units, the fund will have to sell properties to free up the money they need.
Because this takes a long time, it means that when a lot of people are trying to pull their money out simultaneously they could face a bottleneck.
Normally, these huge funds keep liquidity reserves to cover reasonable surges in buying and selling. But recently, more people have wanted to pull out than can be accommodated by the funds’ reserves.
By suspending the fund, the company doesn’t have to rush to sell a property – and can therefore wait for better offers. Imagine the negotiating power a buyer would have if they knew the seller was desperate to offload a property ASAP – the price would not likely be one investors would be happy with.
Find out more: Commercial property funds – liquidity risks
What should I do if I hold these funds?
If you are invested in one of the suspended funds then the decision will be out of your hands. If you are invested in one of the discounted funds, unless you absolutely need the money immediately, consider holding on until things stabilise.
It’s unclear what happens next. Some experts say it could be a matter of months, others say it might take until the end of the year for funds to go back to normal. Funds need to raise enough money to meet the demands of people looking to take their money out, and this means selling property.
But as stated above, funds also want to avoid a forced sale, where the buyer would have more power in determining the price paid for the property.
Find out more: Portfolio builder tool – how much commercial property should you hold?
Should I avoid these funds?
If you want to invest in commercial property, there are a few different ways to go about it.
You could invest in an open-ended property fund like the ones above, which own physical properties.
Or, you could buy a fund that invests instead in companies tied to the commercial property sector – builders for example.
This means you’ll avoid the potential liquidity problem, but be exposed to the stock markets and all the risks they entail – when in fact you might be investing in property to diversify away from stock market risk.
Another option is an investment trust, which is similar to an open-ended fund except it comprises a finite number of shares, which can rise and fall in value according to market demand.
This way you can invest in actual bricks and mortar and circumvent the liquidity problems associated with open-ended funds – except you’ll be vulnerable to the vagaries of share price movement here too.
Find out more: What are investment trusts – closed-ended funds