By Simon Jessop and Carolyn Cohn
LONDON (Reuters) - Britain's top property investment funds have shed almost 10% of their combined assets this year as investors fret about the impact of Britain's exit from the European Union.
The net outflows of client cash - some 2 billion pounds - carry echoes of the mass demand to exit after Britain's vote to leave the EU in 2016. The outflow then led some funds to prevent clients leaving, to buy time to sell assets and raise cash.
That kicked off a regulatory review that concluded on Monday, when the Financial Conduct Authority issued tougher rules for funds investing in hard-to-trade assets like property. It said funds must now be frozen if valuers are uncertain how to assess more than 20% of the portfolio.
Despite that, the FCA maintained the right for retail investors to leave such funds any day they like.
Daily redemptions meant a "fundamental liquidity mismatch remains in these funds", said Alastair Sewell, senior director, fund and asset management at Fitch Ratings.
This was also a problem for money manager Neil Woodford, whose equity income fund invested in a large number of unlisted companies and has been frozen since June 3.
Britain is slated to leave the EU on Oct. 31, although opposition politicians have pushed for the deadline to be extended.
Fund industry tracker Morningstar showed each of the 10 biggest open-ended property funds shed assets between January and August this year as investors pulled cash from the sector.
The M&G Property Portfolio fund was the worst hit, with net outflows of more than 750 million pounds. Others who saw significant outflows included Aberdeen UK Property, with net outflows of 459 million pounds, and Janus Henderson UK Property, with outflows of 204.2 million pounds.
For a graphic on Biggest UK property funds see outflows, click https://fingfx.thomsonreuters.com/gfx/editorcharts/BRITAIN-EU-FUNDS-PROPERTY/0H001QX918M4/eikon.png
For an interactive version of the graphic, click here https://tmsnrt.rs/2l1o0Y6.
Total assets under management for the funds was 11.3 billion pounds at the end of August.
Several other UK asset classes have seen fund outflows this year, including the much bigger equity sector, where investors pulled out 10.5 billion pounds. Others, most notably fixed income, saw inflows, though.
The UK property market outflows compare with inflows of more than 11 billion euros into European property funds over the same period, as more investors continued to look for higher returns.
For a graphic on UK fund sector flows, size in 2019, click https://fingfx.thomsonreuters.com/gfx/editorcharts/BRITAIN-EU-FUNDS-PROPERTY/0H001QX988MS/eikon.png
ADVERTISEMENTFor an interactive version of the graphic, click here https://tmsnrt.rs/2neLIAZ.
For a graphic on Europe, ex-UK fund flows by sector, click https://fingfx.thomsonreuters.com/gfx/editorcharts/BRITAIN-EU-FUNDS-PROPERTY/0H001QX998MW/eikon.png
For an interactive version of the graphic, click here https://tmsnrt.rs/2nfqiDP.
ADVERTISEMENTDisposals by the UK property funds this year include a retail property sold by Kames in Wimbledon, in south London, for 9 million pounds and an office block sold by the same fund in Bristol, in southwestern England, for 8.2 million pounds.
As a result of the property fund outflows, several of the funds have changed the way they price their assets to encourage investors to stay put.
One way to do so is by moving to so-called "bid pricing" when there is more money leaving the fund than entering it, which leads to investors taking a hit for selling out.
Others have increased the level of assets held in cash, so they can pay off investors quickly, although that can prove a drag on performance for the fund and those investors not seeking to leave.
ADVERTISEMENTAverage liquidity in the funds has risen to 17% at the end of July 2019, compared with 14% in June 2016, Fitch's Sewell said.
"There’s been a few liquidity scares in the last couple of years and funds have tried to adjust for this by having high cash levels, as well as a general move to a full spread pricing structure," said Jonathan Miller, director, manager research ratings, UK at Morningstar.
"Still, we've always said that in an illiquid asset class such as physical property, a daily dealing structure isn't appropriate," he added.
ADVERTISEMENT(Reporting by Simon Jessop, editing by Larry King)
