As we forecast in some recent articles, the doom and gloom merchants of the UK media are starting to have an impact upon the UK property sector. Despite the fact we have seen no real change since the Brexit vote a number of investors had been attempting to reduce their exposure to the UK property fund sector which has proven to be very popular over recent times. Many people see property investment as a long-term pension scheme and the opportunity for same-day redemption with some UK property funds seem to give the best of both worlds. So, what can we expect in the short to medium term?
Vultures hover above
New York-based Madison International Realty has announced plans to invest more than £1 billion in the UK real estate market within the next 6 to 18 months. When you look at the drop in the UK currency against the dollar it makes perfect sense for US investors to take advantage but they also have other plans in mind.
Over the last few weeks a number of UK property funds have been forced to suspend redemptions from worried investors. The fact that property investments by definition are fairly illiquid and difficult to move at short notice has put many funds under pressure and created short term cash flow challenges. The only immediate option many had was to temporarily suspend redemptions although the financial services watchdog the FCA is watching the situation carefully. There have been rumours that redemption suspensions could be lifted to allow investors to take a “haircut” on their investments but we await confirmation.
Quality assets first
In a perfect world you would sell your least desirable properties if funds were required in the short term. The current confusion within the UK property market could make it difficult to jettison the less desirable properties with the likes of Madison International Realty suspecting UK property funds will be forced to sell their high quality assets first – and the vultures will be waiting! This could have a dramatic impact upon the UK property fund sector in the short to medium term especially if they are forced to sell at discounted prices for quick settlement.
While we’re not suggesting that any of the funds held by the better performing UK property funds are “low quality” there is certainly a range of investments to take into account various cyclical movements and spread the investment risk. However, how disappointing would it be if short-term cash flow issues forced some of these property funds to let go of the jewels in their crown?
Short-term cash flow
The first question many investors may ask is why these property funds are not able to arrange short term loans to smooth over short-term cash flow issues. This is a very good question although it is likely that many of their assets have already been used as collateral to grow their underlying portfolios. It will be interesting to see the level of debt that property funds in the UK have built up and there is every chance we could see restrictions and new regulations going forward.
However, let’s not forget that all property investments are sold as long-term investments but if you are nearing retirement, and you wish to cash in your chips, why should you suffer because these funds have short-term cash flow issues?