Contagion fear as Columbia Threadneedle suspends property fund

On Oct 12, 2022

Investors fear contagion as Columbia Threadneedle suspends property fund as forced sellers renew liquidity concerns

The £453m CT UK Property Authorised Investment Fund has been suspended
Investors unable to buy or sell shares in the fund until the suspension is lifted
Fears of contagion and widespread suspensions for the third time in five years

Published: 17:13, 12 October 2022 | Updated: 17:14, 12 October 2022

The latest suspension of a UK property fund has led to fears of yet another wave of temporary closures across the sector.

Fund manager Columbia Threadneedle was forced on Tuesday to suspend dealing in its £453million CT UK Property Authorised Investment Fund and its feeder fund in efforts to restore liquidity following a rush of redemptions.

While the fund is currently the only suspended UK property fund, Threadneedle was last week forced to add restrictions to another Threadneedle fund aimed at institutional investors, while BlackRock, CBRE and Schroders also moved to defer payments in some vehicles.

Property funds often hold a mix of offices, residential and commercial buildings, and – increasingly since the onset of the pandemic – warehousing.

CT UK Property Authorised Investment Fund investors will be unable to buy or sell shares in the fund until the suspension is lifted.

Property research analyst at Quilter Cheviot Oli Creasy explained that the Threadneedle suspension ‘is round two of UK property fund trading suspensions’, with the ‘first round’ having been specific to vehicles with significant pension exposure.

Property funds have recently come under pressure from UK pension funds clients, which needed to sell assets in order to meet collateral calls on hedging positions following wild swings in gilt yields.

Creasy said: ‘What we are seeing today looks more like a general UK property market issue and the main Columbia Threadneedle (CT) UK property fund was suspended for redemptions until further notice.

‘Whether this precipitates other UK property fund suspensions across the industry is yet to be seen.’

Should other UK property funds opt for suspension, it will be the third time in five years when the sector struggles to return cash to investors.

What is the ‘liquidity mismatch’ at the heart of UK property funds?

Three waves of UK property fund suspensions in five years has not gone unnoticed by regulators and investors.

Essentially all daily-dealing, open-ended funds are designed to enable investors to invest and withdraw cash with relative ease.

However, as anyone who has ever bought or sold a house will tell you, physical property is an illiquid assets that can’t be cashed in with the same ease as a share, for example.

When UK property funds have been forced to suspend dealing this is because the volume of investor redemption requests is so great they are unable to stump-up the cash.

They opt to suspend often to ‘protect investors’, because forced selling of physical property would very likely result in a deterioration of the fund’s value. The suspension period allows the funds to raise the necessary cash to meet redemptions – while hopefully buying time for investor jitters to calm.

Many asset management experts believe open-ended property funds of this kind are fundamentally flawed, and investors would be better placed building their exposure to property via an investment trust.

In addition to the risk of suspension and the potential for having their cash locked up beyond their reach, investors in an open-ended property fund also often find themselves paying fees to a fund manager holding cash buffers of more than 10 per cent.

The Financial Conduct Authority is aware of these concerns and has been liaising with industry for the establishment of more appropriate vehicles for illiquid assets like property, which would be designed to limit withdrawals to prevent liquidity crunches of this kind.

The first wave of suspension came in 2016 in the aftermath of the Brexit referendum, while the second was a consequence of the 2020 Covid-19 sell-off.

Creasy noted that the CT fund had just 2.8 per cent of its portfolio in cash at the time of suspension, whereas sector rivals are holding an average of 15 to 20 per cent.

He added: ‘The question on investor’s lips will be whether other funds are also facing the risk of suspension?

‘The answer is maybe; there have been instances in the past when contagion has gripped this market, however, it isn’t always the case. Some of the other funds in the market are better-capitalised (for example, L&G had >15% in cash as of 31/08/22) and therefore may be better positioned to cope with further redemptions.’

In a note on Tuesday, analysts at Fitch Ratings said: ‘Contagion risk has been contained so far but increasing redemption requests may cause some funds to make forced sales, pushing down asset values.

‘This could lead to knock-on effects for other funds, through weaker returns, potentially triggering more widespread withdrawals.’

Head of investment partnerships at AJ Bell Ryan Hughes added: ‘News that the Columbia Threadneedle UK Property fund is suspending once again is a stark reminder that open-ended property remains totally unsuitable for daily traded investments.

‘It’s remarkable that this still needs to be said given this is the third time in the past six years that this situation has occurred.

‘The liquidity mismatch is clear for all to see, and the highly volatile conditions currently being witnessed in markets exacerbates that risk when investors take flight and look to liquidate assets quickly

“We still await the outcome of the FCA’s review into the dealing frequency of open-ended property funds, with the original proposal of a 180 day notice period first being proposed back in August 2020.

‘Over two years later we appear to be no further forward, with existing investors still left in limbo and the sector essentially uninvestable given the material uncertainty surrounding the redemption terms.’

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