‘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

Mon, Jul 11, 2016 - Page 7

The financial strains from Britain’s vote to leave the EU are starting to show, as worries ripple through the country’s real-estate market.

In the most prominent sign of the pressure, three major real-estate funds have frozen withdrawals in the past 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 extremely low prices, deepen losses and prompt more investors to rush for the exit.

The turbulence after the “Brexit” vote has been high, as investors rapidly exchange risky assets for safer havens. Yields on US Treasury securities 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 2007 and 2008 global financial crisis — officials have put in place the necessary measures to protect the broader system from a shock.


The Bank of England on Tuesday said that the environment had become “challenging,” adding 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 businesses 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 post-referendum world can be confident they will be supported by the financial system,” 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 (US$32.38 billion) in assets under management. The Aviva, Standard Life and M&G funds account for about one-third of that market, Khalaf said.

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 last month, driven in part by a steep decline in residential construction before the referendum, according to a Markit/CIPS UK Construction Purchasing Managers’ Index released on Monday.

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.

“Suspension is a mechanism that is laid out under stringent FCA regulations, and when it is employed by one of our members, it shows that the regulations are working as they are supposed to,” the group said.

Additional reporting by David Jolly