Fri | Oct 19, 2018

Investors rush to sell out of UK commercial property

Published:Friday | July 8, 2016 | 12:00 AM

The prospect of an economic downturn in Britain and the risk of businesses moving away from London are raising concerns that Britain's commercial real estate might drop in value.

On Wednesday, three more financial firms - for a total of six this week - suspended trading in their United Kingdom commercial real estate funds after investors rushed to sell out.

Henderson, Columbia Threadneedle and Canada Life said they had to suspend trading in the funds, which buy and own commercial property and sell shares to investors. When investors rush to sell their shares, that drains the funds dry, which then risk having to sell properties they own to pay investors back.

The jitters in the real estate market have pushed down the pound to a 31-year low of US$1.2950.

On Tuesday, three financial firms stopped trading in their respective UK commercial property funds following a rapid increase in investors trying to sell their holdings.

Some of those investors now appear worried that companies might opt to leave London to move operations to mainland Europe to retain access to the EU market. That would vacate office space and weigh down on real estate values in Britain's capital.

Aviva Investors, Standard Life and M&G Investments said they froze the funds to protect other investors who wished to remain in the funds.

"Redemptions have now reached a point where M&G believes it can best protect the interests of the funds' shareholders by seeking a temporary suspension in trading," the company said of the £4.4 billion (US$5.8 billion) fund.

The moves come even as the Bank of England moved to reassure markets it would avoid a repeat of the 2007-2008 financial crisis, freeing up more money for loans to businesses and households. Drawing another line under another dramatic day, a group of senior bank leaders - including the chairmen of Barclays, Royal Bank of Scotland and HSBC - met with Treasury chief George Osborne and promised to keep money flowing into the system.

"We have a clear plan. We're putting measures in place," Carney said. "And it's working."

In a time of political upheaval, Carney offered the counterpoint of confidence and control, announcing changes to the amount of rainy-day funds banks have to hold. That, he hopes, will help the banks lend as much as £150 billion (US$199 billion) more, supporting the economy during the uncertainty surrounding the exit from the single EU market of some 500 million.

Carney, however, was direct in explaining that some of the risks to the economy predicted before the referendum had in fact begun to crystallise.

Among them was the concern about the skyscrapers, shopping centres and other big buildings that have come to epitomise London's growth as a financial powerhouse. The Bank of England had cited the commercial real estate market as one of the risks to the British economy, saying the sector has taken in capital from overseas and had become "stretched".

The concern is that other funds will have to be frozen as investors look to get their money back.

"The problem these funds face is that it takes time to sell commercial property to meet withdrawals," said Laith Khalaf, a senior analyst at Hargreaves Lansdown.

The funds have cash buffers to protect them when investors sell their shares. But those seem to have been exhausted, Khalaf said.

- AP