Recent reports from the last three months of 2018 have shown that withdrawals made from real estate funds have gone up significantly, following the latest developments in Brexit negotiations.
Investment in commercial property in the UK has always relied on real estate funds; and it's these funds which have seen vast withdrawals and shifts following the no-deal Brexit talks at the end of last year. For many investors, this isn't a concern, however; based on reports it's commercial property that is shifting, residential property is still going strong - and even growing in locations like Manchester, Liverpool and Sheffield.
But what is a property fund; what makes this different from investing in a residential unit?
A real estate fund is similar to an individual investors' portfolio; however, it's professionally managed and often includes a diverse supply of holdings. More commonly used for commercial or corporate rental properties, funds allow smaller investors who may not have the funds individually to invest in larger scale projects and commercial opportunities. A real estate fund also allows an individual investor to diversify their portfolio successfully through professional management.
Towards the end of 2018, there was a massive surge in the number of investors who made withdrawals from their funds - totalling £315 million. This led to the Financial Conduct Authority requesting daily liquidity reports from UK property funds following anxiety over the UK's exit from the EU next month. The withdrawals are reported to have started around the same time that Prime Minister Theresa May cancelled a parliamentary vote on her proposed Brexit deal (The Financial Times, 2018).
Consilium Asset Management reported that "a consequence of the withdrawals is that a number of the UK's most well-known property funds initially suspended trading and subsequently some have imposed different measures to stop clients temporarily withdrawing cash from the funds. As property is classified as an illiquid asset (meaning it can take time to sell easily, without drastically reducing the price of the asset) the fund managers have been forced into the situation of restricting the purchase and sale of the units within the funds."
The actions being taken by real estate funds in the past couple of months appear to mimic the actions taken in June 2016 - and the months following - after UK citizens voted to leave the EU, which saw £466 million withdrawn from property funds in June, and a further £328 million in July 2016 (Morningstar, 2016).
Adrian Benedict, real estate investment director at Fidelity International, said in 2016: "Property funds have started to mark down the values of retail assets within their portfolios, and we're only part way through that journey."
It appears that a similar situation is happening now as Brexit approaches still surrounded with uncertainty.
When we compare the figures from June and July 2016 to the last three months of 2018, the amount that has been withdrawn from funds is certainly much less, with a total of £336 million being withdrawn in these months. While some investors have reported that their withdrawals are due to uncertainty surrounding Brexit and predicting that the outcome will have a negative effect on their equity on commercial properties, some investors remain positive and believe that Brexit will have a positive effect on UK property funds.
Gerry Frewin, manager of the Threadneedle UK Property Fund, is optimistic about what Brexit means for the property market. He pointed out that tenants, even commercial tenants, all have lease agreements and are contracted into these for a set amount of time without fines for early exit, so the chance that investors will see from their projects is minimal. "However, over time we may see more CVAs as a result of high street failure if the economy suffers," he added.
Justin Upton, co-fund manager of the M&G Property Portfolio, echoes Mr Frewin's optimism: "Two years on from the referendum and commercial property is still delivering attractive returns. Despite the negative sentiment following the vote, the decision to leave the EU hardly made a dent in medium-term performance and by the end of 2016, capital values had all but recovered their summer losses."
These actions and concerns certainly give commercial real estate fund investors a lot to consider before the Brexit exit date at the end of March. Danielle Levy of Money Observer considers what UK investors need to think about ahead of this date: "For those who invest via funds, no-deal or hard Brexit could have implications beyond the impact on markets. After Brexit, the UK will become a 'third party', a country with an economic relationship with the EY but not a member. This is significantly for 'Undertakings for Collective Investments in Transferable Securities' (Ucits) investors because there is no 'third-country regime' in place for Ucits funds, which means it could become difficult for UK investors to but these funds after Brexit."