The uncomfortable moment of truth has arrived for property funds in the UK (and their investors). Following the initial tumble of the post-Brexit dominoes - eight major funds so far either gating redemptions or forcing massive haircuts on to investors who want out - contagion concerns even woke up Britain's regulators (and central bank) as fears of Bear-Stearns-esque forced liquidations spread; and now, as The FT reports, that is what has just started.
With every UK property fund knowing every other UK property fund needs to sell assets (real physical illiquid property) to meet cash calls (in their unreal faux-liquidity funds), the game-theoretical first-mover advantage has begun with Henderson Global Investors, which has begun offloading prime assets to provide liquidity to investors... (as The FT details)
The major fund plans to sell 440 Strand, the headquarters of the private bank Coutts, by the end of 2016.
The property, bought for £175m in 2014, was valued at £220m before the Brexit vote and will be formally brought on to the market in the autumn by the suspended Henderson UK Property fund, according to two people briefed on the plans.
The sale of 440 Strand is one of a number of disposals expected to follow the suspensions of seven property funds last week after investors rushed for the exit following the UK’s vote to leave the EU. Henderson, which manages the fund through TH Real Estate — its joint venture with the US retirement provider TIAA-CREF — declined to comment.
Funds holding more than £15bn of investors’ money are preventing redemptions, including the UK’s largest property fund, M&G’s £4.3bn Property Portfolio, and funds from Standard Life, Henderson, Aviva, Columbia Threadneedle and Canada Life.
Aberdeen Asset Management, which suspended its fund for a shorter period than the others — until July 13 — has begun marketing properties including an office building at 10 Hammersmith Grove, the UK headquarters of Fox International, a division of 21st Century Fox.
Early bids on the buildings Aberdeen is marketing indicated yields 50 basis points higher than before the Brexit vote, according to people briefed on the sales.
This indicates there will be discounts, but [ZH - we note The FT's carefully scripted "do not panic" edit here] not the steep drops in price seen during the 2008 financial crisis.
But given the following chart as an example of the 'liquidity gap' between fund-level liquidations and the exuberant UK real estate market, things could get ugly very quickly...
Perhaps even more troubling is the reality that you sell what you can, not what you want to...
Property funds are expected to focus initially on disposing of “prime” assets, which will be easier to sell in uncertain markets, agents said.
Investors are more worried about properties in sectors thought to be vulnerable to Brexit, such as London offices.
Which suggests the lower-quality assets could be severely impaired, just as Richard Divall, head of cross-border capital markets at the property advisers Colliers, admitted:
"Brexit has caused short-term panic and stalling to most of the UK market, but... UK real estate needed re-pricing — the world looked at the UK as too expensive nine months ago."
And with managers forced to liquidate some of their best holdings to raise cash, the potential for fire-sale prices is very real (once again that chart above suggests the mark-to-market impact on real UK property alone could be significant), and that is why, as we previously noted, the Bank of England has been mulling a bailout...
The Bank of England's 'strawman' here is likely the first step down the road of a full-blown bailout - a slush-fund to promise to buy UK property from the funds... with the hope that once they even mention it, investors will stop their selling and pile back in.
Of course, we have seen and heard all of this before (about 9 years ago) when any number of government backstops, bailouts, partnerships, and direct buying did nothing to stop the contagious collateral chain collapse following the gating and liquidation of two Bear Stearns funds. We will never learn and this time is no different for as one major fund manager warned...
“This throws up all sorts of questions about the suitability of daily-traded, open-ended property funds that are giving investors access to an illiquid asset.”
But all the time investors believe a central bank has their back, this is not a problem... until it is THE problem, and the walls come thundering down.
It would seem monitoring the price-discussions of 440 Strand (£175m in 2014 shooting up staggeringly quickly to £220m pre-Brexit) is as good an indicator of crisis as any... and perhaps the least manipulated (for now).