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UK tightens scrutiny of real estate funds after heavy withdrawals ahead of Brexit

The Financial Conduct Authority requested daily reports from UK property funds starting in December, when investors withdrew £315M

A UK government agency asked real estate investment funds for daily liquidity reports after their investors withdrew hundreds of millions of pounds amid anxiety over the UK’s pending exit next month from the European Union.

Chicago-based investment research firm Morningstar said retail investors withdrew £315 million from UK real estate funds in December.

The Financial Times reported that the UK’s Financial Conduct Authority (FCA) increased its scrutiny of property funds in December around the time that Prime Minister Theresa May canceled a parliamentary vote on her proposed Brexit deal, a regulatory framework for the UK’s exit from the European Union.

Morningstar data show that investors withdrew £466 million from property funds in June 2016, when UK citizens voted to leave the EU, and another £328 million in the following month.

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The redemptions led seven major property funds to suspend trading, most of them for months. The FCA subsequently expressed satisfaction with the funds’ decision to suspend trading, which prevented a large volume of desperate fund-asset sales from causing the type of collapse in property prices that occurred during the 2008 financial crisis.

In December, large property funds coped better with redemptions than in 2016 because they had large holdings of cash and liquid securities to sell. These include a £3.7 billion M&G fund, a £3.3 billion L&G fund and a £2.8 billion Janus Henderson fund.

But David Wise, co-manager of the Kames Property Income fund, told the Financial Times that UK property funds have responded to redemption requests and a depressed market for retail properties by selling assets in greater demand, including offices buildings and industrial real estate.

Adrian Benedict, real estate investment director at Fidelity International, said property funds have started to mark down the values of retail assets within their portfolios, “and we’re only part way through that journey.” [Financial Times] – Mike Seemuth

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