Mon, Jul 11, 2016 - Page 7 News List

‘Brexit’ starting to snarl up UK economy

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

By Chad Bray  /  NY Times News Service, LONDON

However, the sector has been shaken by new uncertainty since Britain decided to exit the EU. 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.

In December last year, a US 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.

With withdrawals mounting, the managers at Aviva Investors, M&G Investments and Standard Life decided it was prudent to do the same.

Investor redemptions in the M&G Property Portfolio and its feeder fund “have risen markedly because of the high levels of uncertainty in the UK commercial property market since the outcome of the European Union referendum,” M&G said in a news release on Tuesday.

It said a temporary suspension would allow its managers time to “raise cash levels in a controlled manner, ensuring that any asset disposals are achieved at reasonable values.”

On its Web site, Aviva Investors said that its Property Trust fund, which was worth £1.8 billion pounds at the end of May, had been “experiencing higher than usual volumes” of redemption requests.

A day earlier, Standard Life Investments, the asset management unit of the large British insurance company, also halted redemption requests in its UK Real Estate Fund.


It said it had seen an increase in requests for redemptions “as a result of uncertainty for the UK commercial real-estate market following the EU referendum result.”

Such funds are already proving a point of concern for the British authorities.

The Bank of England’s report on Tuesday said that “valuations in some segments of the market, notably the prime London market, had become stretched,” adding that any fall in commercial property prices could be “amplified” by investors and real-estate funds.

“These open-ended funds could be forced to sell illiquid assets to meet redemptions,” the report noted.

At a news conference after the release of the report, Britain’s Financial Conduct Authority (FCA) chief executive Andrew Bailey said that so-called open-ended real-estate funds faced a structural problem, in that their assets did not “revalue naturally” in the market.

Bailey said it was “sensible” to suspend all withdrawals, because authorities did not want those who “get to the door quickly to get a better deal than those that don’t.”

However, he conceded that the authorities believed there was a mismatch between such tradable funds and their investments in illiquid real estate assets, and needed to look at “the design of these things,” Bailey said.

The Investment Association, an industry group that represents British fund managers, said that the use of suspensions of redemptions is an important tool that prevents fund managers from being forced to sell too quickly and achieve better results for clients.

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