M&G, Aviva funds suspend trading amid escalating fears for UK property market

Aviva and M&G have suspended trading in property funds after a surge in the number of requests for withdrawals

Zlata Rodionova,Hazel Sheffield
Tuesday 05 July 2016 15:55
Aviva said it could not a give a time frame for when the suspension would be lifted
Aviva said it could not a give a time frame for when the suspension would be lifted

Three major property funds have suspended trading amid escalating fears for the UK property market following Britain’s vote to leave the EU.

M&G and Aviva followed Standard Life after a rush from investors to get their money out.

M&G stopped trading in the shares of its M&G Property Portfolio, which is worth £4.4bn and invests in 178 UK commercial properties across retail, industrial and office sectors on behalf of UK retail investors.

M&G said that orders placed after 12pm on 4 July would not be processed until the suspension was lifted. A review will take place every 28 days.

Aviva, the savings and investment group, also suspended redemptions from its £1.8bn property fund on Tuesday afternoon, blaming “extraordinary market circumstances”.

Standard Life Investment UK had earlier announced that it would shut a property fund worth £2.9bn to stop a rush on withdrawals.

A spokesperson for Aviva said: "The extraordinary market circumstances, which are impacting the wider industry, have resulted in a lack of immediate liquidity in the Aviva Investors Property Trust. Consequently, we have acted to safeguard the interests of all our investors by suspending dealing in the fund with immediate effect."

The group added that it could not a give a time frame for when the suspension would be lifted.

The announcement came just three hours after the Bank of England warned share prices of UK real estate investment trusts have fallen sharply following the referendum. The Bank said in its twice-yearly report on financial stability that falling shares could have a knock-on effect on domestic companies and the wider economy because 75 per cent of small businesses use commercial property as collateral for loans.

“Any adjustment in commercial real estate markets could be amplified by the behaviour of leveraged investors and investors in open-ended commercial property funds,” the Bank of England said. Any such amplification of market adjustments could affect economic activity by reducing the ability of companies that use commercial real estate as collateral to access finance,” it added.

The central bank’s report also noted that foreign investment in the UK commercial real estate market fell by 50 per cent in the first quarter of this year.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the dominos are starting to fall in the UK commercial property market. “It’s probably only a matter of time before we see other funds follow suit. The problem these funds face is that it takes time to sell commercial property to meet withdrawals, and the cash buffers built up by the managers have been eroded by investors heading for the door, both in the run-up to the EU referendum, and in the aftermath,” Khalaf said

He predicted that foreign investors might be tempted to invest by the fall in sterling, but equally they may decide to steer well clear of an economy in limbo.

Aviva’s announcement sent the pound below $1.3075, down 1.6 per cent, breaching the $1.3118 low reached on the Monday after the results of the referendum were announced. That means the pound is worth 12 per cent less to UK holidaymakers in the US than it was before the referendum.

The Bank of England has said that it is likely to cut interest rates over the summer to combat a post-Brexit slowdown. The Governor Mark Carney also suggested that a move to lower the cost of borrowing could come as early as July.

“In my view, and I am not pre-judging the views of the other independent MPC [Monetary Policy Commitee] members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,” Carney said.

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