In the aftermath of the Brexit vote, one asset class to come under fire is UK commercial property. In particular, open-ended funds which hold physical property are coming under significant pressure due to their lack of liquidity. Unlike prominent equities, property cannot be bought and sold quickly and easily. Property funds therefore typically hold substantial cash balances that allow them to fund redemptions as and when they occur.
However, if a large number of investors decide to encash their holdings in the event of a market shock, the fund may not have enough cash reserves to meet all the redemptions requests at once. If this occurs, fund managers have the option to suspend trading until further notice in order to assess the full extent of the withdrawal requests and whether they need to sell some properties in order to raise sufficient capital. Given the sudden rush to sell after Brexit, many open-ended property funds have adopted this approach.
This liquidity problem is why we prefer to use closed-ended structures such as REITS (real estate investment trusts) when investing in property. These are listed companies that trade on stock exchanges in the same way as equities. The key attraction compared to open-ended funds is that they benefit from having permanent capital, meaning management can invest its capital more efficiently and focus on achieving the fund’s objectives without having to manage investment inflows or redemption requests. In the current environment they are therefore not forced sellers and may indeed be able to pick up bargains from any open-ended funds that are forced to sell in order to meet redemptions.
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