U.K.-based commercial real estate funds have been hammered

Since the Brexit, U.K.-based commercial real estate funds have been hammered, losing value as investors scramble to pull their money out of a falling real estate market. Some analysts predict that the market value for London office space could crater by 20% or more as financial firms and other international companies lay off workers and scale back their exposure to the U.K. market. (For more, see also: U.K. Property Funds Freeze Assets, Suspend Trading.)

“The selling process for real estate can be lengthy as the fund manager needs to offer assets for sale, find prospective buyers, secure the best price and complete the legal transaction. Unless this selling process is controlled, there is a risk that the fund manager will not achieve the best deal for investors in the fund, including those who intend to remain invested over the medium to long term.” – Standard Life Investments

While the British market is taking the brunt of the hit, the effect may fan out abroad, as many of the fund administrators in these U.K. property funds tend to be parts of larger insurance and investments companies—some of which are headquartered in the U.S.

6 Real Estate Funds so far Have Frozen Assets

Since the Brexit, six large real estate funds have frozen their assets and suspended trading as a flood of redemptions has poured in. With assets frozen, investors are unable to withdraw their funds until the freeze is lifted, which could last anywhere from days to months. The six funds were holding assets totaling more than £11.2 billion ($14.5 billion) before the Brexit.

1. Standard Life Investments froze its assets after falling 15%. Prior to that event, the fund held £2.7 billion in funds. In a statement, the company said, “given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices. The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilizes.”
2. Aviva suspended trading in its £1.8 billion property fund due to illiquidity and falling share value, citing, “market circumstances, which are impacting the wider industry, have resulted in a lack of immediate liquidity.”
3. M&G Property Portfolio Fund, with £4.7 billion in assets, stated “Investor redemptions in the fund have risen markedly because of the high levels of uncertainty in the U.K. commercial property market since the outcome of the European Union referendum.”
4. Henderson UK Property Fund suspended all trading in its £200 million real estate portfolio due to “exceptional liquidity pressures” after the Brexit and recent suspension of other direct property funds.
5. Columbia Threadneedle suspended redemptions and halted trading as the £1.3 billion asset manager, blaming uncertainty in the U.K. property market following the Brexit referendum.
6. Canada Life suspended its U.K. property fund holding £222 million in assets in order to “protect the interests of all investors in the property funds” amid falling share prices.

Who’s Next?

These six funds may be the canary in the coal mine, hinting at further asset freezes and suspensions, and ultimately a falling real estate market in the U.K., which may have ripple effects abroad as well.

According to the U.K. Association of Real Estate Funds, these real estate funds are the largest potential next six casualties, each with a billion British pounds of assets under management or more, to see an investor exodus (ranked by size of AUM):

1. BlackRock Property UK Fund (£3.3 billion)
2. Legal & General Managed Property Fund (£2.8 billion)
3. Schroder UK Real Estate Fund (£2.3 billion)
4. Lothbury Property Trust (£1.5 billion)
5. Hermes Property Unit Trust (£1.3 billion)
6. The Charities Property Fund (£1.0 billion)

These five funds, totalling another £12.2 billion, invest in the same sorts of commercial real estate assets that the six that have suspended trading do.

The ability to suspend funds, while it may frustrate investors, does have the upshot of being able to prevent forced liquidations at ever lower prices, especially for the relatively illiquid assets that are commercial real estate holdings. This could allow for a more orderly sale of these assets, that can ultimately prevent an all out panic from hitting the U.K. property market. (For more, see also: The Brexit Vote Could Boost U.S. Real Estate.)

The Bottom Line

Six U.K. real estate investment funds have been forced to suspend redemptions and halt trading in its shares as investors flock to withdraw their money following the Brexit vote. While those funds account for £11.2 billion in value, a similar amount of value is at risk if the top six largest remaining property funds experience the same investor exodus. U.S.-based BlackRock is the largest fund manager in the space—indicating that the U.K. is not isolated in the fallout from this wave of redemptions.