UK Property Fund Update
Two property funds shares prices are down 6% as withdrawals have forced a change in pricing policies.
Similar to the effect of 2016's Brexit vote, investors have been cashing out of property funds due to uncertainty surrounding the upcoming Brexit vote in the UK Parliament.
The funds run by Columbia Threadneedle and Kames Capital repriced their funds from an 'offer' to a 'bid' basis to deal with increased withdrawals amid Brexit fears.
The sale price of shares in Columbia Threadneedle’s £2.7 billion UK Property Authorised Investment funds dropped by 6.1% and Kames Capital Property Income funds similarly dropped by 5.7%.
Due to the redemptions it may be necessary for the funds to sell some of the property assets that they hold to increase the level of cash in the funds to pay investors selling their shares in the funds.
Several property funds were forced to suspend trading in the summer of 2016, while others applied various strategies to effectively deliver exit penalties with an average of 9.4% if investors sold their interests in the funds.
Kames and Columbia Threadneedle's actions are not as severe as the mechanisms put in place in 2016 but has reignited the debate as to whether property funds are run within sufficient criteria to ensure liquidity in a market downturn to make the funds suitable for retail clients.
Open-ended property funds can face liquidity issues during times of market depression. They issue new shares and buy more properties when investments come in, and cancel shares and sell properties when investors sell their interests.
Properties by their nature are illiquid and the sale process can take time and money to complete. Indeed, it is the costs of sales that have prompted Kames and Threadneedle to change the pricing policies of their funds.
Of course it would be likely that when there are more investors investing rather than selling, the pricing policies would revert to the pre-December model.
However, in the meantime, if investors require cash and are forced to sell their investments, they will do so at a temporary disadvantage.