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Brexit vote hits UK property sector


Standard Life has suspended dealing in its UK Real Estate fund following a rapid increase in redemption requests as a result of the Brexit vote. Investors won’t be able to buy or sell units in the fund until further notice, while the managers look to raise cash by selling off some of their portfolio.

Standard Life has taken this action in order to protect investors who wish to remain in the fund, who could otherwise be negatively affected by fund liquidations. Laith Khalaf, Senior Analyst, Hargreaves Lansdown says that the move follows downward price adjustments across the sector, and may be followed by similar actions by other funds in the sector.
“Property funds are clearly under pressure as a result of the Brexit vote, and we could now see a new wave of investors being unable to liquidate their property funds quickly, which we last witnessed during the financial crisis.
“This is part of the problem with investing in open-ended property funds, and one of the reasons we don’t recommend them to investors. Property does offer diversification, and a reasonable yield compared to government bonds, but investors must be willing to accept high costs, and a lack of liquidity when the market turns down.
Closed-ended property funds at least provide investors the chance to sell out during market upheaval, though widespread selling serves to depress share prices and widen discounts in times of stress. Indeed there are currently a number of closed-ended property trusts trading at discount in excess of 10 per cent. However, being closed-ended does at least means the manager does not have to liquidate properties at a time when everyone else is looking to do the same.
“Given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices. The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilises.
“Continued low interest rates in theory provide support for commercial property, because as prices fall, yields become even more attractive. However at the moment, investors appear to be leaving the sector, rather than buying in.”
In a separate note, Simon Calton, CEO of Rycal Investment group, comments that property in London has, in recent years, been acquired by globally operated businesses, looking to conduct relations within Europe.
“Using London as a base, they were able to passport into the EU, a benefit that will now no longer be an option. In addition to the potential mass vacation of these properties, currently occupied by businesses, it has become apparent that property sales that were due to take place, are collapsing amidst an economic landscape lacking confidence in the future.
“During 2015, Singaporeans were the top Asian buyers of UK commercial property, however last week, one of Singapore's largest lenders, UOB, suspended their loan programme for London properties. In a statement to the BBC, UOB stated: ‘We will temporarily stop receiving foreign property loan applications for London properties. As the aftermath of the UK referendum is still unfolding and given the uncertainties, we need to ensure our customers are cautious with their London property investments.’”
Calton writes that at present, the other lenders in Singapore, DBS and OCBC bank continue to offer finance but urge their customers to be cautious.
“Any investment comes with a degree of risk, but when there is confidence in the market and clear economic policy in action, it is more likely that people will invest more openly. Clearly, at present, as reiterated by UOB, the market sits in a vulnerable position where, whether Article 50 is triggered or not, the next two to four years are a complete unknown.
“For private and corporate property investors, the concerns over relocation of offices in the financial sector and a yet unknown exit strategy, influencing public spending and the demand for property for people within the UK, have created cause for re-evaluation. As a result, more than GBP650 million of commercial property deals in London have collapsed since 23rd June. Amongst these high profile transactions, was Germany's Union Fund, who had been in negotiation to buy Cannon Place, the GBP20 million purchase of 1 Chancery Lane by a private Spanish investor, and the GBP190 million purchase of the London headquarters of law firm Eversheds by KanAm, a German real estate investor.
“For private property purchases, there has been a similar trend seen with overseas buyers pulling out of sales and house prices starting to drop, without interested buyers. The UK housing and commercial property market could potentially suffer these impacts of uncertainty for some time to come.”
Calton advises "The US is still the safest place, invest in US dollars … diversify and look for a long-term strategy."

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