In the most prominent sign of the pressure, three major real estate funds have frozen withdrawals in the last two days, to slow the exodus of nervous investors. By doing so, the funds are trying to prevent a vicious cycle of selling that could force them to dump assets at ultralow prices, deepen losses and prompt more investors to rush for the exit.
The turbulence after the so-called Brexit vote has been high, as investors rapidly exchange risky assets for safer havens. Yields on American Treasuries have touched new lows, while the pound is down sharply. Stocks have been shaky, and shares in some British real estate companies have shed more than a third of their value.
The three real estate funds – run by Standard Life, Aviva Investors and M&G Investments – each pointed to heightened levels of stress in the market prompting investors to sell. A top British regulator on Tuesday highlighted the potential risk to such funds, which invest heavily in assets that are tough to sell quickly.
“The reality is we don’t fully know what the economic impact of the Brexit is going to be,” said Laith Khalaf, a senior analyst at Hargreaves Lansdown, a British financial services company. “The concern is it’s going to be negative.”
Authorities around the world are paying close attention to the economic, financial and political fallout of the vote, and have plans to move quickly to keep the damage from spreading too far and too fast. The reverberations could test whether, since the global financial crisis, officials have put in place the necessary measures to protect the broader system from a shock.
The Bank of England, Britain’s central bank, warned on Tuesday that the environment had become “challenging,” noting that there were “tightening credit conditions” in the commercial real estate market. To help provide support for the economy, the central bank cut the buffer that British banks need to keep on their books, a move that should allow them to lend more to business and consumers. “When combined with the already strong balance sheets of UK banks, today’s action means that UK households and business who want to seize viable opportunities in a postreferendum world can be confident they will be supported by the financial system,” the Bank of England governor, Mark Carney, said on Tuesday. “Financial institutions, like the rest of us, desire certainty in order to plan for the future.”
Funds that invest in the British property market look particularly vulnerable in the wake of the Brexit vote. Real estate, particularly high-end properties in London, boomed in recent years as interest rates remained at record lows. Investors, in turn, chased yield, creating huge demand for mutual funds that invested heavily in the country’s malls, office towers and residential developments.
While they represent a small piece of the mutual fund world, such investments have £25 billion in assets under management. The Aviva, Standard Life and M&G funds account for about one-third of that market, according to Khalaf of Hargreaves Lansdown. Even before the vote, the signs of stress were apparent in the real estate market. Ever-rising prices prompted concerns about a property bubble. Construction activity in Britain posted its weakest performance in seven years in June, driven in part by a steep decline in residential construction ahead of the referendum, according to the latest Markit/CIPS UK Construction Purchasing Managers’ Index, which was released on Monday.
But the sector has been shaken by new uncertainty since Britain decided to exit the European Union. London’s future as a regional hub for commerce is in doubt.
Cities across Europe are looking to lure companies and jobs. An economic slowdown is an increasing possibility.
Mutual funds that focus on real estate face a particular problem in the current tumult. Such funds hold assets that are difficult to trade, but investors can ask for their money back at anytime. When investors panic, the redemption requests can quickly exhaust the funds’ cash on hand.
Last December, an American mutual fund run by Third Avenue ran into a similar problem, reflecting the portfolio’s significant exposure to the riskiest types of high-yield bonds. Rather than unload assets into a difficult market, the managers opted to bar the door.