UK Fund Managers Start Dumping Properties, Admit "Real Estate Needed Re-Pricing"

Tyler Durden's picture

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).

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offwirenews's picture

haha I'm sure the BOE will beg to differ. Silly fund managers think they can decide valuations. Leave that to the professional manipulators.

philipat's picture

First commercial property, next individual property owners will panic and want out. That's too big for BOE even. Next, Vancouver, Sydney, San Francisco. Property prices NEVER go down do they?

Dindu Nuffin's picture

JAPAN PROPERTY BUBBLE 2006 - REDUX.

BURN THIS MOTHA FUCKA DOWN POOKY.

Let the Goyim wake up and Question the Jew, and 'muh 6 trillion'.

buzzsaw99's picture

there is no market there is only the boe.

silverer's picture

Property prices just got a bit ahead of the printing presses. Give them a bit of time to catch up.

Debugas's picture

when the prices fall 80% i shall start looking

someone was joking about 15% haircut ? lol you gonna have 80% haircut

philipat's picture

You'll be waiting a long time for that IMHO. London prime residential could fall 30-40% in an extreme reaction but 80%? You're dreaming..

tonyw's picture

Spot on, with an extra 300k+ people coming into the country every year there is always upwards pressure on property prices.

Most holders of prime residential do not need to sell, they don't have mortgages.

The Pound has gone down against the USD over the last two years so there is a discount of 25%.

In EUR terms a discount of 10%.

The annual prime residential property taxes are low so a good place to hold some "escape" money if in a dodgy country.

philipat's picture

Yes agreed fully, to non-GBP based investors, strategic investments in London are already looking attractive. But the market still has a ways to fall in GBP terms, perhaps 30-40%, at which time it will be a good investment again. If there is a world financial crisis again, which I believe is rapidly approaching, I still don't see prime Central London prices dropping much more than that BUT the rates of future appreciation will be very considerabely lower...

Cryoprase the Troll's picture

> The Pound has gone down against the USD over the last two years so there is a discount of 25%.

> In EUR terms a discount of 10%.

That also means a 10% drop in previously unrealised capital gains in EUR, and more importantly a 10% drop in any ongoing revenue (realised in Euros). 

Couple that with increased risk due to Brexit and I'm not surprised "foreign" investors want out. I sold my property ETF's recently (at a handsome profit). Once it settles down I may buy back in (for the yield) but I ain't in any rush to sit under a sword of Damocles (falling knife + suspended redemptions ;).

css1971's picture

Prices won't change much at all. 225 ounces of gold.

Houses Depreciate's picture

80% isn't just possible, it's likely. Remember..... current housing prices are 300% higher than long term trend, irrespective of location.

Stu Elsample's picture

....so those stinky filthy 3rd world trash leeches who (with the help of EU globalists) have invaded England have nothing to do with falling property values???

Ghordius's picture

eh... BreXit, remember?

besides, there is no such thing as "EU globalists", particularly not any that "help" non-europeans to enter England, particularly not from the 3rd world

whatever role the EU has in England, it's not about that. Poles are white and Catholic, for example

further, every and each immigrant has a small property values raising impact, generally speaking and applied to a whole country. because it's a whole country, not a local neighbourhood in the outskirts of a small city

see London. the highest real estate values, the least native English population proportion, the biggest 3rd World population proportion

philipat's picture

Yes agreed, being outside the Schengen zone, which, like the Euro, the UK had the good sense not to join, did prevent millions of refugees from America/NATO,s illegal wars in the ME flowing into the UK.

London property prices were just plain nose bleed over-valued anyway and a large correction was coming irrespective of Brexit. Brexit was, of course, used both ahead of the vote and since as the big bad boogeyman, and it might to a certain extent have been the trigger but not the cause.

Where I live, Indonesia, the Government does not allow foreigners to buy Freehold property (Or even 99 year leases like in Central London where most property is still owned by the Duke of Westminster, given by the Crown for services rendered in financing various wars over the centuries, like most of the landed nobility in the UK) so property prices have remained affordable for the local population and prime property has not been monopolised by Chinese and other illegal funny money laundering, as in so many major Cities. This seems to me like a reasonable idea should Western Governments really have any interest in protecting their populations from Global Bankster speculative money printing, which of course they don't....and the Duke of Westminster and the rest of the oligarch scumbags would never allow that to happen now, would they?

css1971's picture

Bankers in London are a little more sophisticated than that. You just set up a company that owns the property and float the shares of the company. etc.

There are always ways round capital restrictions. The UK and London it's a particular problem because land space is so limited. The UK is physically tiny compared to most of Europe.

The real solution is to subsidise production of properties in the UK. Supply more than the market can bear, while in the meantime reduce demand. Second / empty properties not being tax exempt for council tax for example. Immigration restriction obviously.

Prior to Mrs Thatcher, local councils used to be required to produce social housing for residents at a certain rate. That was all killed off. The property bubbles are a post Thatcher phenomena. Obviously a deliberate policy to benefit Conservative donors with large property portfolios.

philipat's picture

At the end of the day, it is all about political will. There are ways of restricting foreign investment using Companies (On or offshore) in residential property. Several legal strategies involve restrictions on Freehold ownership Titles by offshore Companies. These are NOT capital restrictions but restrictions on Freehold title ownership That political will simply does not exist. So yes, you are correct that more properties need to be built for the people in the UK and I also agree that Government policy and subsidies must be used to achive these goals. At the end of the day, London will collapse if something isn't done because workers will no longer be able to afford to live there. So no more nannies, teachers, store workers, fast food workers etc. And commuting isn't the answer either because costs in the UK of commuting are also stratospheric in comparison to elsewhere in Europe.

Ghordius's picture

I'm not sure I see the role of the Duke of Westminster in your comment the way you write about

I understand that His Grace's role is somewhat benign, in the case you are writing about "...so property prices have remained affordable for the local population..."

while I also read "the Duke of Westminster and the rest of the oligarch scumbags..."

it's a good comment, and you leave me with more questions then answers. what "would they not allow to happen", exactly?

it's still London we are talking about, isn't it? It's previous mayor, Boris Johnson, chief campaigner for BreXit out of the ranks of the Tory party, was practically cheering any foreign oligarch that wanted to come to London and spend that "global bankster funny money" in RE there

are you making a general case for limited property for foreigners? i.e. leasehold? in such case, why is Westminster a scumbag, nevertheless?

philipat's picture

The Duke of Westminster never worked a day in his (Or generations of his predecessors) life and the wealth was all from the Monarchy in exchange for services rendered, along with financing from the Rothschilds etc. So, scumbags yes. He and his ilk own half of prime Central London, "Granting" leases on their property.

So he and his oligarch friends would never allow any changes to UK property ownership laws which would dilute their control over prime Central London or on the total amount of property than any single person could own. As of now, foreign "ownership" in prime Central London is mostly of 99 year Leasholds. So restricting foreign "ownership" to shorter durations of Leashold would be an effective strategy to reduce the attractiveness of London property to foreign "Buyers", if indeed there were a political will to effect change. Which there never will be because these parasites who control the system will never allow it to happen.

Is that clear now?

Ghordius's picture

not completely, but it helped. thx

so I understand you are making the classic liberal with some element of socialism case against the conservative case based on how people got what they have

that would be the "Champagne Liberal" case that everybody ought to have a chance, and perhaps everybody ought to start from zero, or near that

modern Oligarchy is somewhat based on that, exemplified by the American Dream of "from rags to riches", where US Oligarchs are careful to hide any inheritance to their children, making them "trust babies" and so

the old Aristocracy is somewhat opposed to that. "What I inherit is mine, period", and scrap any inheritance taxes. That's the conservative case, pure and simple

I have a personal small bias versus the second approach, in the specific case of inheritance, whereas I think I can understand your angle, bar the "scumbag" part

because I have a strong personal bias against judging people based on how they were born, that's all. I prefer to judge people based on what they do

in this case, you noted a small benign effect, didn't you? in fact, you would prefer them to decrease the amount of years of a leasehold to foreigners

so in short, you are saying, in my ears, that those "scumbags" aristocrats (not oligarchs)  are doing the right thing and you would like them to do more of it, and this all while calling them parasites

correct? besides my wording, that is?

philipat's picture

No, I don't agree with ANY of that.

  1. I don't agree with ANY inheritance taxes on reasonable Estate valuations such that limited property rights may be handed down from generation to generation.
  2. I do believe that Governments should act in the best interests of their people and property values have in many countries become an issue which needs action by Government as a result of speculative excesses by foreign "investors".
  3. I do believe that Government subsidies should be applied to the building of new affordable properties for lower income people.
  4. I do believe that excessive property ownership should be limited for individuals and their Nominee Company Structures and that this should be tackled through both Estate Duties and other fiscal measures as necessary.
  5. I do believe that foreign ownership of property in a country should be restricted legally via property titles not capital controls so as to protect the people of that country from speculation by Bankster speculative funny money wherever, especially when this amounts to "money laundering" as is the case in the US and the UK.

There is nothing "champagne liberal" about any of that. I have no problem with people making a lot of money through hard work and productive investment of capital, like I did. I do, however, have a problem when society loses its moral compass and Government (See the definition) becomes corrupt and ignores the best interests of its people by adopting the oligarch/fascist system which has become the norm in the West and is leading to massive social unrest and revolution. IMHO, "champagne socialism" is actually the opposite side of the same dirty, hypocritical coin as fascism. Hillary Clinton would be the perfect illustration of that.

RawPawg's picture

a wise property investment would be some place isolated,far from the maddening  areas of "politics"

with an underground bunker,perhaps

Priceless!!!!

philipat's picture

That's why all the oligarchs are buying in New Zealand. private jet landing strips and underground bunkers included.

Ghordius's picture

+1 and you get a free visit by Gandalf and his band of dwarfes and hobbits

don't forget sailing. New Zealand is a heaven for yachts. highest proportion of boats vs people of the whole world

philipat's picture

Yes, I have friends with yachts in Auckland. I share theirs when I go there and they share mine when they come here, so that works very well because it's a different type of sailing and they don't have many Komodo Dragons in Auckland. Incidentally, if you have never been to New Zealand you should. It is truly a well kept secret and one of the most beautiful places on earth. Oh, and they also play quite good rugby, unlike most of Europe except the UK...

RawPawg's picture

good luck getting there before it all falls apart

if you ain't in a safe place before shtf, good luck

philipat's picture

I'm in Bali, Indonesia. So, southern hemisphere and well south of the jetstream which will carry all the nuclear fallout around the Northern hemisphere. For a while at least, so may stay alive a little longer than than in Europe or the US?

Paul Kersey's picture

"Henderson Global Investors, which has begun offloading prime assets to provide liquidity to investors"

The words, 'real estate' and 'liquidity' do not go well together, especially once greed has turned into fear.

northern vigor's picture

When real estate prices drop, they go down like an elevator dropping...it doesn't even slow down hitting the sides.