UK Property Funds Froze $12B Worth of Capital Outflow

M&G Investments, Aviva Investors and Standard Life Investments have suspended trading in U.K. real estate funds in the latest market fallout from Britain’s vote to leave the European Union. Industry watchers are warning that London office values could fall by as much as 20 percent within three years of the country’s split from the EU. Nervous shareholders are rushing to cash out, but the funds have comparatively low levels of liquidity and often hold them through shares in real estate investment trusts, which have been hammered since the vote.

Three of the U.K.’s largest real estate funds have frozen almost 9.1 billion pounds ($12 billion) of assets after Britain’s shock vote to leave the European Union sparked a flurry of redemptions.

M&G Investments, Aviva Investors and Standard Life Investments halted withdrawals because they don’t have enough cash to immediately repay investors. About 24.5 billion pounds is allocated to U.K. real estate funds, according to the Investment Association.

“The dominoes are starting to fall in the U.K. commercial property market,” said Laith Khalaf, a senior analyst at Hargreaves Lansdown. “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.”

The pound fell to its weakest level in three decades against the dollar Tuesday, surpassing lows reached in the aftermath of the Brexit vote, as the freezing of the property funds spooked global markets. Bank of England Governor Mark Carney pledged to shore up financial stability on a day when a survey showed a plunge in U.K. business confidence.

The last collapse of the real estate in London was during the financial crisis of 2007 and 2008, real estate funds were forced to freeze operations after withdrawals surged, contributing to a property-market slump that saw values drop more than 40 percent from their U.K. peak. Investors fled German property funds as well, forcing 12 to close for redemptions.

Regulators had already planned to meet with the U.K.’s largest asset managers on Tuesday to discuss the effect of Brexit on the industry. The meeting comes as the Financial Conduct Authority’s new chief executive officer Andrew Bailey told reporters that while the fund suspensions were not a “panic measure,” the regulator “may need to look at the design” of property funds.

Almost 3 billion pounds has been wiped from the market value of the FTSE 350 Real Estate Investment Trust Index since trading started Monday. Land Securities Group Plc, the U.K.’s largest REIT, tumbled 9.1 percent over the period.

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