Property funds: Industry “ignored” lesson of financial crisis

The suspension of trading in UK property funds following the Brexit vote was because “a key lesson from the last crisis had been ignored”, says a real estate securities investor.

Marc Haynes, senior vice president at Cohen & Steers, said open-ended funds are “fundamentally inappropriate vehicles for investing in inherently illiquid investment like physical property”.

Haynes’ company promotes investment in real estate securities, saying they are more liquid than physical property.

A number of UK property funds suspended trading after the Brexit vote, though funds run by Aberdeen Asset Management and Columbia Threadneedle have since re-opened.

Open-ended property funds offer investors high liquidity while investing in illiquid assets and several UK commercial property funds had to be ‘gated’ when investors pulled their money out faster than properties could be sold to fund their redemptions – a situation with echoes of the financial crisis when a number of alternative funds suspended trading for the same reason.

“Presumably, managers thought things would be different this time and enhanced liquidity buffers would provide adequate protection against substantial withdrawals linked to market stress,” said Haynes.

If anything was different, it was the growth of model portfolios and managed funds services, he said. “This concentrates decision-making, enabling asset allocators to shift tens of millions of pounds at the push of a button and exacerbate the problem.”

Haynes said the UK financial regulator must address the “structural flaws” of open-ended direct property funds and implement a ban on daily dealing.

Haynes said real estate securities are a more natural fit for open-ended vehicles due to better liquidity.  Cohen & Steers describes itself as the largest investor in real estate securities in the world.

The New York-listed firm has $61.3 billion of assets under management in real estate and other assets.

Academics including Professors Donald B. Keim and Joseph Gyourko at the Wharton School have said real estate securities are linked to the performance of real estate and Keim has even advocated that they be considered a separate asset class to other equities.

For more background on property fund suspensions, see here.

Columbia Threadneedle has since said it would re-open its fund on September 26.

©2016 funds europe



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