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The pace of withdrawals from UK commercial property funds has accelerated rapidly since the government unveiled its “mini” Budget last month, in a shift that analysts warned could spark a rush to sell buildings at depressed rates.
More than £100mn was pulled from a sample of property funds tracked by Calastone, a fund trading provider, in the 10 days after UK chancellor Kwasi Kwarteng laid out plans to cut taxes and borrow heavily from financial markets — almost eight times the volume withdrawn over the previous three weeks.
Commercial property markets are already under strain from a jump in borrowing costs and a drop in the volume of deals that makes it hard to judge valuations. Now analysts warn that consistent withdrawals by investors could force funds to jettison assets, dragging prices down further.
“One way or another those assets are going to have to be sold into a down market,” said Zac Gauge, head of European real estate strategy at UBS.
Gauge and other property analysts expect sales completed today to be at values 20 to 25 per cent lower than they were earlier this year, before interest rates rose to rein in inflation stoked by Russia’s invasion of Ukraine.
The rush by investors to retrieve their cash comes after turmoil in the market for UK government debt, which forced some pension funds to sell assets to meet collateral calls on their hedging strategies.
Rapid withdrawals pose a problem for some property funds, which can take several months to offload properties in their portfolio. Earlier this week, funds run by Schroders, BlackRock and Columbia Threadneedle announced measures to slow the pace of investor redemptions so they could sell assets in an orderly way.
Other large UK-based investment houses contacted by the Financial Times have said their property funds are still running as normal. However, the pace of outflows indicates that pressure is building.
The move has renewed criticism of the vehicles, which came under fire after they blocked withdrawals in the wake of the Brexit vote in 2016 and again following the outbreak of the pandemic in 2020.
Roger Clarke, head of IPSX, an exchange for property, said there is a fundamental issue with the structure of funds that often give buyers the opportunity to jump out at just a day’s notice. “The funds are forced to sell their best assets. The redeeming investors are then getting their redemption at the expense of the rest of the people in the fund [if valuations decline]. So the rational investor puts in a redemption request,” said Clarke, who expects funds to gate if redemption requests continue.
Commercial property values have started to slide in recent months, as rising borrowing costs have hit investors’ ability to transact.
Last month, developer Landsec sold 21 Moorfields, Deutsche Bank’s new London headquarters, for £809mn, below the £1bn the company had hoped to bank from a sale earlier in the year.
As well as ructions in the gilt market, the property sell-off “relates to the increased competitiveness of bond yields tempting income investors, concerns about occupancy levels in a possible recession and heightened refinancing risk linked to higher market interest rates,” said Edward Glyn, head of global markets at Calastone.
The most likely buyers will be institutions with deep enough pockets to skirt the debt markets, according to Clarke at IPSX.
“I’m afraid we’ll see a lot of UK assets trade to overseas sovereign wealth and private funds. UK institutional capital [and] UK savers are losing their trophy assets again,” he said.
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