Here's More Proof Property Isn't Liquid

(Bloomberg Opinion) -- In investing as in comedy, timing is everything — a lesson holders of U.K. property funds are about to (re)learn at their cost.

In the wake of the U.K.’s 2016 referendum to leave the European Union, British property funds were among the investments quickest to suffer as asset managers trapped $23 billion by halting redemptions in seven funds. With the global pandemic threatening to trash the economy, U.K. real estate vehicles are again at the vanguard of illiquidity — casting renewed doubts over their suitability as investments that offer daily withdrawal rights.

Aviva Plc, Legal & General Group Plc and Columbia Threadneedle Investments are among firms that have frozen redemptions from funds overseeing about $13 billion of U.K. real estate this week. With the Association of Real Estate Funds citing “material valuation uncertainty,” and the Financial Conduct Authority saying “a fair and reasonable valuation of commercial real estate funds cannot be established” — both statements made on Wednesday — there’s a real prospect that the entire U.K. property fund sector may close for withdrawals in the coming days.

The funds that have gated cover the gamut of property classes and geography, according to their most recent fact sheets. That suggests the market dislocation is widespread and not just restricted to, say, shopping malls. The Legal & General fund has 35% of its assets in industrial property, compared with less than 5% for the Aviva fund, for example. About 10% of the latter’s portfolio, meantime, is in London, compared with just 0.4% of the Threadneedle fund’s assets.

New rules proposed by the FCA last year compelling fund managers to suspend redemptions if there’s “material uncertainty” about the value of 20% or more of a funds’ real estate holdings were due to come into force later this year. Asset managers clearly aren’t hanging around in the current climate for their cash holdings to be depleted by investors demanding repayment.

Time and again, the hard to sell nature of office buildings and shops and warehouses, compared with the almost frictionless markets for stocks and bonds, keeps catching the fund management industry out. Investors in a 2.5 billion-pound ($3 billion) fund run by M&G Plc have been locked in since December, when the firm said it faced “unusually high and sustained outflows,” which it was struggling to meet.

As I argued then, while it’s clearly desirable for retail investors to have different ways of investing in bricks and mortar, the illiquidity of real estate is incompatible with the pretense that such vehicles can be redeemed on a daily basis. Regulators need to provide official cover for asset managers to drop their pledge to let customers take their money out on a continuous basis; three- or six-month lockups make a lot more sense, provided the industry moves in lockstep.

On the basis you should never let a good crisis go to waste, it’s time for the regulators to resolve the timing mismatch between the funds and their underlying asset transactions — albeit too late for the U.K. investors who currently have savings trapped in shuttered funds for the foreseeable future.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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