It has been another bad day for London-listed property funds and investment trusts as investors head for the hills in the wake of the EU Referendum vote.
Investment trusts are taking a battering. Schroder Real Estate IT (SREI) fell 8.8% to 45.1p in early trade, Picton Property Income (PCTN) declined 7.8% to 59.8p and F&C Commercial Property (FCPT) dropped 7.3%.
The biggest faller is Standard Life Investments Property (SLI), a closed-ended investment trust, which lost 9.8% of its value on Tuesday to trade at 69.8p.
Real estate has been hit hard by the UK’s decision exit the EU. Investors are concerned that the referendum result will lead to lower economic growth, hitting valuations and tenant demand. The fear is that many of the commercial sites in which these property funds invest could soon be lying empty if companies break their leases and pull-out of the UK.
There are reports that more than £650 million worth of deals for offices in the City have been cancelled since the referendum result. These deals, many involving international investors, are collapsing on fears that financial services companies might re-locate elsewhere in the EU.
This situation has become so grave that asset manager Standard Life (SL.) suspended trading in its £2.9 billion open-ended UK real estate fund on Monday. A rise in the number of investors trying to pull their cash out was behind the decision. Aviva Investors and M&G followed suit by suspending trading in two of their property funds.
The problem that the Standard Life fund faces is that most of its cash is tied up in properties. It can take weeks, even months, to sell a large office block or a shopping centre, especially for a reasonable price, and this creates a liquidity crunch as the number of exiting investors soar. It's a bit like the run seen on the old Northern Rock bank in the teeth of the financial crisis.
Standard Life was left with little alternative than to hit the suspend button to protect its asset base and its remaining investors.
Darius McDermott, Chelsea Financial Service’s managing director, warned that long-term property investors should not be panicked into making a move.
'Property is still a good diversifier in an overall portfolio and yields on these funds may also increase, which will be a positive for income investors.'