Funds mark down commercial UK property 5% in wake of Brexit
Fund managers handling more than £10bn in UK commercial property assets have marked down the value of the buildings they own by 5 per cent in the wake of the UK’s vote to leave the EU.
The writedowns are an indicator of property investors’ pessimism about the impact of the vote on their assets.
UK property funds run by Henderson, M&G Investments, Standard Life Investments, Aberdeen, Legal & General and Kames Capital have all reduced the value of their property portfolios by between 4.5 to 5 per cent using a so-called “fair value adjustment” on the advice of valuers.
“We believe that properties coming to market now are unlikely to achieve recent valuations in terms of sale price — at least for the time being,” said a spokesperson for Aberdeen, adding that there was “evidence of buyers avoiding the current market uncertainty”.
The devaluations come after three years of double-digit returns from UK property investments, according to the IPD index.
They were mostly carried out by open-ended funds that are open to retail investors who can demand their money back at short notice, adding urgency to the question of correct pricing. However, one — the Standard Life Pooled Pension Property product — is aimed at institutions.
“In these circumstances, there is a risk that investors who redeem will receive too high a value for their shares at the expense of those who stay in the fund,” said M&G in a note to its investors.
Managers are also seeking to head off problems like those experienced in the 2008 crisis, when a rush by investors to cash out of property funds forced many to sell buildings at fire-sale prices and others to suspend redemptions, some for a period of years.
“[The price cuts] reflect where they think confidence is right now and its influence on pricing,” said Adrian Benedict, investment director for real estate at Fidelity International in London. Fidelity, which runs institutional funds, has not so far adjusted its pricing.
“The industry is trying to make sure we don’t repeat the mistakes of 2008 and 2009, when we saw an imbalance in flows,” he added.
A series of commercial property transactions fell through in the wake of the referendum, while Cushman & Wakefield, the property advisers, expect that those that go ahead will undergo “pricing adjustments”. A handful of deals have proceeded, including a Surrey office block sold to residential developers, but agents report a quiet market since the vote.
Equity market investors have meanwhile sold off real estate investment trusts, especially those exposed to the London office market, which is expected to suffer from financial services companies relocating some staff elsewhere in Europe.
More broadly, there are concerns that commercial property will suffer from companies delaying decisions about office space and from slower economic growth.
The two largest real estate investment trusts, Land Securities and British Land, have fallen 13 per cent and 20 per cent respectively, while smaller property companies focused on London such as Great Portland and Derwent London have dropped 20 per cent or more.