The COVID-19 pandemic and its spread across the globe has sent markets into an apparent period of freefall, after arguably the longest bull run (rising market) in history. These turbulent conditions have led to a number of property funds suspending as they are left unable to accurately value their underlying properties.
The first to do so was Kames Capital’s Property Income Fund on 16th March, with others following suit over the past week. At the time of writing (23rd March), the number of suspended property funds totals at least seven. The latest managers to do so, St. James’s Place have stated that “we are in a position where we are unable to price the fund in a way that we would ordinarily be able to do … and that leaves us with no alternative.”
Many UK property funds will be invested in those areas most at risk due to customers staying home, e.g. restaurants, shops, hotels and cinemas. Also common are offices and warehouses, which although not immediately at risk, are susceptible to staff illness. In this government-imposed shutdown and ghost-town like high streets, valuers are simply unable to carry out their job.
So, what happens now? The suspensions mean that no money can be taken out of or added to the funds for the foreseeable future. Once markets become more stable and begin to recover, we should begin to see these funds re-opening. At this point in time, we are unable to offer any estimates as to when this might be, but we would suggest that much of the market is directly aligned with the spread of the virus.
In the 4th quarter of 2019, a few fund managers, Baggette Asset Management Ltd included, took the decision to remove property exposure from their funds. Active management cannot help a fund manager predict ‘black swan’ events such as COVID-19, however it does allow them to react more quickly when they begin to perceive added risk, such as illiquidity of the property sector.
It is important to remember in these times of uncertainty and worry that these funds have suspended to protect investors. The Financial Conduct Authority (FCA) require funds to suspend in times of “extreme market volatility” to ensure that the unusually high amount of redemption requests is not adversely affecting those remaining investors.