HomeBlogFinanceFire sale begins as property funds face rush of UK redemptions

Fire sale begins as property funds face rush of UK redemptions

Property funds are dumping assets worth more than £1bn on to the London market as pressure mounts to meet redemption requests, with estate agents warning that they will have to accept big discounts in order to sell.

UK real estate funds, including vehicles managed by Schroders, CBRE Investment Management, Legal & General Investment Management, M&G and Abrdn, are marketing at least 18 commercial assets collectively priced at about £1bn in the capital, according to property agents.

Fund managers insisted that the sales were being triggered as they rebalanced portfolios on behalf of clients, but property agents said the level of activity was far higher than normal.

“You might have that number of sales by UK funds in a year. The fact we’ve got that many on the market at the same time is unusual,” said one commercial property agent, who added that the bulk of properties have hit the market in the last two months.

Funds have been under increasing pressure to meet investor redemption requests from institutions including pension funds, which are dealing with the fallout from former chancellor Kwasi Kwarteng’s “mini” Budget in September.

The chancellor’s promise of £45bn in unfunded tax cuts — now almost entirely scrapped — caused gilt yields to spike, making commercial property a relatively less attractive asset.

The intervention also forced pension funds using so-called liability-driven investment strategies (LDIs) to sell off assets including property fund holdings in order to meet collateral calls.

Investors pulled £184mn in October from a sample of retail and institutional property funds tracked by Calastone, the largest global fund trading provider, more than twice the £89mn pulled from the vehicles in September.

The accelerating pace of withdrawals has forced funds to act. M&G and LGIM are the latest funds to defer withdrawals this week on two institutional property funds, joining Schroders, Columbia Threadneedle and BlackRock in limiting redemptions.

Michael Barrie, head of fund management at LGIM Real Assets, said the fund was acting in response to “exceptional market conditions” in order to protect clients.

M&G said it had acted because redemption requests exceeded cash balances as a “result of some defined benefit pension clients needing to either raise liquidity or rebalance their portfolios, as a result of volatility in the public markets”. It added that the fund’s underlying assets were still performing well.

The company noted that two commercial properties it had on the market in central London, valued at a combined £111mn, were not linked to the gated fund.

Columbia Threadneedle said it had “ongoing sale and purchase pipelines” across its commercial real estate business.

Funds must now sell into a very challenging market to free up cash and meet redemption requests.

Commercial property sales have dried up as investors wait for prices to adjust to the new reality of higher interest rates and the perception among buyers is that anyone selling today is under pressure.

“We saw some forced sellers for sure, some people having to take a 10-15 per cent haircut [on price], said Neil Slater, head of real assets at Abrdn.

“You will have some investors who have to sell for clients — either because of liquidity needs, or strategic allocation changes — and that is playing out now,” He added that retail redemptions have not been as high as many had anticipated and the firm’s property funds continue to function as normal.

Abrdn’s property funds are currently holding nearly a fifth of their value in cash as a buffer against redemptions.

The two biggest sales being marketed by UK funds are office buildings in prime London locations: Schroders is selling Wenlock Works in Shoreditch for £170mn and LGIM is selling a block called Senator in the City of London for £157.3mn. 

Both have been for sale since before the “mini” Budget, but the commercial property agent expects both will now have to accept offers well below asking price. The asset LGIM is selling is not held in the fund that slowed redemptions, but in a separate Limited Partnership structure.

“People who are willing to spend money want to know they’re buying from a motivated vendor [because] they are trying to take advantage of the stresses and strains out there . . . They are focused on these fund sales because the vendors are under pressure,” he said.

“It’s a very stressful and difficult time for the fund managers [but] part of the healing process of these downturns is the forced sales, which reprice the market and allow you to move on,” he added.

Schroders said its UK real estate fund “remains focused on divesting assets where the business plan has been completed and, just as importantly, reinvesting the proceeds and targeting assets where performance can be actively enhanced by the team”. It added that it expected “strong demand” for properties it was marketing in the capital.

CBRE IM declined to comment.

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