Contagion fear as Columbia Threadneedle suspends property fund

Economy
By Liam

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Investors fear contagion as Columbia Threadneedle suspends real estate fund as forced sellers renew their liquidity problems

  • The £453m CT UK Property Authorized Investment Fund has been suspended
  • Investors unable to buy or sell shares in the fund until suspension is lifted
  • Fears of contamination and widespread suspensions for the third time in five years

By Mike Sheen, because this is money

Published: 17:13 BST, October 12, 2022 | Updated: 17:14 BST, October 12, 2022

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The latest suspension of a UK property fund has sparked fears of yet another wave of temporary closures in the sector.

Fund manager Columbia Threadneedle was forced on Tuesday to suspend trading in its £453m CT UK Property Authorized Investment Fund and its feeder fund in efforts to restore liquidity after a rush of redemptions.

While the fund is currently the only suspended property fund in the UK, Threadneedle was forced to add restrictions to another Threadneedle fund targeting institutional investors last week, while BlackRock, CBRE and Schroders also moved to defer payments in some vehicles.

Real estate funds often have a mix of offices, residential and commercial buildings and – increasingly since the start of the pandemic – warehouses.

Real estate funds often have a mix of offices, residential and commercial buildings and – increasingly since the start of the pandemic – warehouses.

Investors in the CT UK Property Authorized Investment Fund will not be able to buy or sell shares in the fund until the suspension is lifted.

Real estate research analyst at Quilter Cheviot Oli Creasy explained that Threadneedle’s suspension is ’round two of the suspension of trading of property funds in the UK’, with the ‘first round’ being specific to vehicles with significant pension exposure.

Real estate funds have recently come under pressure from UK pension fund clients, who have had to sell assets to meet demand for collateral on hedging positions following wild swings in government bond yields.

Creasy said: ‘What we are seeing today looks more like a general problem in the UK property market and the UK’s main Columbia Threadneedle (CT) property fund has been suspended from redemptions until further notice.

“Whether this triggers other suspensions of UK property funds across the industry remains to be seen.”

Should other UK property funds opt for suspension, it will be the third time in five years that the sector has struggled to return money to investors.

What is the ‘liquidity mismatch’ at the heart of UK property funds?

Three waves of suspension of property funds in the UK in five years have not gone unnoticed by regulators and investors.

Essentially, all open-end funds that are traded daily are designed to allow investors to invest and withdraw cash with relative ease.

But as anyone who has ever bought or sold a home will tell you, physical property is an illiquid asset that cannot be cashed in with the same ease as, say, a stock.

When UK property funds have been forced to suspend trading, it is because the number of redemption requests from investors is so high that they are unable to pile up the money.

They often choose to suspend in order to “protect investors” because forced sales of physical real estate would most likely lead to a deterioration in the value of the fund. The suspension period allows the funds to raise the money necessary to meet redemptions – while hopefully giving time for investor jitters to calm down.

Many wealth management experts believe that these types of open-ended real estate funds are fundamentally flawed and that investors would be better able to build their real estate exposure through an investment trust.

In addition to the risk of suspension and the possibility of their money being locked out of their reach, investors in an open-ended real estate fund often also have to pay fees to a fund manager who holds cash buffers of more than 10 percent.

The Financial Conduct Authority is aware of these concerns and has reached out to the industry to set up more suitable vehicles for illiquid assets such as real estate, which would be designed to limit withdrawals to avoid this type of liquidity shortage.

The first wave of suspension came in 2016 in the wake of the Brexit referendum, while the second was a result of the Covid-19 sell-off in 2020.

Creasy noted that the CT fund held only 2.8 percent of its portfolio in cash at the time of suspension, while competitors in the industry hold an average of 15 to 20 percent.

He added: ‘The question on investor’s lips is whether other funds are also at risk of being suspended?

‘The answer may be; there have been instances in the past where contagion has gripped this market, but that is not always the case. Some of the other funds in the market are better capitalized (e.g. L&G had >15% cash on 31/08/22) and may therefore be better positioned to handle further redemptions.”

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In a note on Tuesday, analysts at Fitch Ratings said: “Contagion risk has been limited so far, but increasing redemption requests could lead to some funds being forced to sell, driving asset values ​​down.

“This could lead to knock-on effects for other funds, due to weaker returns, potentially leading to more widespread withdrawals.”

Head of Investment Partnerships at AJ Bell Ryan Hughes added: “The news of the Columbia Threadneedle UK Property Fund being suspended again is a strong reminder that open ended real estate remains totally unsuitable for daily traded investments.

“It is remarkable that this has yet to be said, as this is the third time in the past six years that this situation has arisen.

“The liquidity mismatch is clear for all to see, and the highly volatile conditions currently seen in the markets increase that risk as investors flee and want to liquidate assets quickly.”

“We are still awaiting the outcome of the FCA’s assessment of the trading frequency of open-ended real estate funds, with the original 180-day notice proposal first proposed in August 2020.

“More than two years later, we don’t seem to be moving forward, with existing investors still in limbo and the sector essentially uninvestable given the material uncertainty surrounding repayment terms.”

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