On 11th September 2020, the Fitch Rating published a statement on UK open-ended commercial property funds’ ability to successfully re-open will hinge on how much liquidity they maintain relative to pent-up investor demand for access to invested capital.
Redemption requests may be high upon re-opening if investors who had wanted to redeem after redemptions were suspended attempt to do so. In addition, investors may seek to exit funds before extended redemption terms are potentially imposed. Failure to re-open could damage confidence in individual funds, the associated investment managers and the broader sector.
St. James’s Place and Columbia Threadneedle plan to re-open suspended funds on 10 and 17 September, respectively. These funds’ combined assets under management of about GBP4.2 billion represent about 20% of the total volume of suspended UK property funds. Fitch does not rate any UK property funds.
Liquidity risk is a major focus for fund regulators, given the potential for spill over. The acute liquidity mismatch in open-ended property funds (namely daily liquidity for investors despite highly illiquid real estate investments) means that their ability to re-open may weigh heavily on regulators’ thinking as they consider reforms following mass redemption suspensions in response to coronavirus-induced market stress. For example, the UK Financial Conduct Authority is currently considering proposals that may limit investors’ ability to redeem relative to current arrangements.
The Royal Institute of Chartered Surveyors recommended a general lifting of the ‘material uncertainty’ clause on UK real estate valuations on 9 September. Most UK commercial property funds suspended redemptions in March as market uncertainty hampered the accurate valuing of underlying real estate investments. The recommendation paves the way for funds to assign estimated values to their property portfolios again and provide a redemption price to investors.
To re-open successfully, the funds will need sufficient liquidity on hand – cash and readily marketable securities (some hold property equities as well as direct property) – to meet all redemption requests. The risk that investors who could not redeem during the suspended period will attempt to exit at volume upon re-opening may be exacerbated by potentially impending regulatory changes.