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Threadneedle: we were ready for Brexit panic

A year after property funds suspended trading Don Jordison remains ‘bitterly disappointed’ but says recovery has ‘embarrassed’ some investors.

 
Threadneedle: we were ready for Brexit panic
 

A leading fund manager has hit back at claims that open-ended UK commercial property funds were ill-prepared for the Brexit vote.

A year on since some of the largest property funds suspended trading after the European Union (EU) referendum, Don Jordison, manager of the £1.2 billion Threadneedle PAIF Retail and Threadneedle Feeder UK Property funds, said his team put various measures in place – including having lots of cash to hand – in anticipation of any fallout from the vote.

‘We had 22% liquidity in our property authorised investment fund, we had another £100 million of properties prepared for sale. We had the fund in “containment” for two years, which means we had not sold our fund to any new clients for two years prior to the referendum. I don’t know how much more prepared we could be?’ he asked.

After the UK’s shock decision to leave the EU, a large number of investors in open-ended property funds withdrew their money. This resulted in six property funds suspending trading because they were unable to sell properties quickly enough to generate the cash they needed to return to investors. Other funds continued to trade but imposed penalties of 10% to 15% to discourage investors from redeeming.

A total of £14 billion in UK commercial property funds were affected, including Jordison’s funds, which suspended trading in July 2016 and reopened in September of the same year.

Reflecting on the experience, Jordison said he was ‘bitterly disappointed’ that they were amongst the suspended funds. Nevertheless, he was pleased the team was able to sell £250 million of properties in 40 transactions in the six weeks after the ballot at pre-Brexit vote valuations. He put this down to strong demand for UK commercial property from investors who were ‘unconcerned about daily dealing and redemptions’.

FCA criticism

Last week, the that property funds had been justified in halting or penalising redemptions in the aftermath of the Brexit vote. However, it said there was room to improve the ‘quality of liquidity monitoring and management’ after finding wide differences between the methodologies used by fund managers.

Jordison noted that open-ended property funds only account for 3% of the UK property market but can have a disproportionate impact when sentiment turns sour.

This is because these funds face the challenge of providing daily dealing to underlying investors, but invest in illiquid assets that can’t be sold immediately. This creates the potential for funds to become forced sellers and buyers depending on whether money is flowing out or pouring in.

‘There is this really horrible 90% correlation between flows in and out of open-ended property funds and short-term movements in commercial property capital values.

‘How depressing is that? I didn’t go to college to learn about land economy to be in a market which is driven by independent financial advisers selling or redeeming out of open-ended funds. But that’s just the way it is,’ Jordison said.

The good news is that the financial watchdog was aware of the influence open-ended funds could have on the market and the potential ramifications for financial stability.
‘Their mission in life, along with the Bank of England, is to maintain financial stability. And they are buggered if they are going to have 3% of the market undermine the other 97%,’ he added.

This was the case in 2008 when mass redemptions in the New Star Property fund drove the market down, according to Jordison. As the fund initially held off suspending trading, it ended up selling properties at any price to accommodate the outflows, which affected pricing and sentiment.

‘It was different this time [in the wake of the Brexit vote] because 10 years ago we had a complete financial vacuum. This time, there was plenty of money out there,’ he explained.

‘Embarrassed’ investors

One year since the trading suspensions, performance has pretty much recovered.

‘That one-off knee-jerk liquidity-driven reaction with some forced sellers inhabiting the space led to a 3% sell-off in values. Most of that has been reeled in so we are strangely pretty much back where we started,’ he added.

Over the 12 months to the end of June, Threadneedle UK Property has returned 6.2% with a 4.5% yield. Nearly 27% of the fund remains in cash, however. 

Jordison says it is unfair that the UK commercial property market got caught in the ‘crossfire of the bad sentiment and exhaust fumes’ that followed the Brexit vote. He was pleased that this didn’t happen again when Article 50 was triggered or after the snap election.

‘I think we are out of the woods there. I really believe that people are slightly embarrassed about their emotional reaction to how the referendum came out,’ he said.

He suspected some investors who sold out after the referendum may have returned to commercial property, a costly move given they would have had to pay again the ‘spread’ or extra charge on property funds to cover stamp duty and fees.

In the fund manager’s opinion, the market is currently supported by low vacancy rates, low leverage levels and affordable debt. He was encouraged to see that valuations rose during the first half of 2017, with little impact so far from the hung parliament election result.

In addition, overseas buyers remain active in the UK commercial property market, tempted in by a weaker pound. The fund currently has no exposure to London, which Jordison believed still looked overvalued.

Retail revolution

On a sector level the fund manager says retail is undergoing profound change, which has been beneficial for industrial estates.

‘Amazon has created a world where people expect that they can have goods delivered to their front door within a day of ordering them. The only way you can do that is by final mile fulfilment.

‘You can tell when something is “hot” because it is given a new name: they are not called industrial estates anymore, they are called urban logistics,’ Jordison joked.

Nevertheless, he said investors should not give up on high street retail. He described specific shopping centres, such as Bluewater, as ‘black holes that are soaking up retail expenditure’. He added that there were many retail formats that were difficult to replicate online.

3 comments so far. Why not have your say?

PaulSh

Jul 27, 2017 at 09:03

So the open-ended property funds prepared for the Brexit vote by effectively soft closing in advance and stuffing 22% of their customers' monies into woollen socks under their managers' beds instead of investing it in property like they were supposed to do. Then immediately after the vote, they suspended redemptions and moved into panic selling mode, the absolute last thing that the property market needed in the immediate aftermath.

When will the FCA act to shut down these jokers by insisting that open-ended funds may NOT hold illiquid assets such as property?

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Rory

Jul 27, 2017 at 20:13

Just like the Y2K boondoggle in 1999, the professional doomsters set up a nice little earner by increasing stock market churn when even the dogs in the street knew that Project Fear was a busted flush. It may be rather more serious when the ECB jumps ship over the sinking Italian and Spanish banking sector.

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andy

Jul 29, 2017 at 09:29

Tend to agree with both of you.

Question is when is the entire industry going to wake up to the fact that the UK government hasnt got a plan for dealing with any of the fallout of BREXIT. A hard border with Ireland now looks inevitable, a hard border with France will also be essential - but the government is off on its holidays pretending none of this is critical.

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