Investors pile out of UK property funds after bond market shock

Taken from an article published in Financial Times on the 10th October 2022, here: Investors pile out of UK property funds after bond market shock | Financial Times

Roger Clarke, head of IPSX, an exchange for property, said there is a fundamental issue with the structure of funds that often give buyers the opportunity to jump out at just a day’s notice. “The funds are forced to sell their best assets. The redeeming investors are then getting their redemption at the expense of the rest of the people in the fund [if valuations decline]. So the rational investor puts in a redemption request,” said Clarke, who expects funds to gate if redemption requests continue.

Commercial property values have started to slide in recent months, as rising borrowing costs have hit investors’ ability to transact.

Last month, developer Landsec sold 21 Moorfields, Deutsche Bank’s new London headquarters, for £809mn, below the £1bn the company had hoped to bank from a sale earlier in the year.

As well as ructions in the gilt market, the property sell-off “relates to the increased competitiveness of bond yields tempting income investors, concerns about occupancy levels in a possible recession and heightened refinancing risk linked to higher market interest rates,” said Edward Glyn, head of global markets at Calastone.

The most likely buyers will be institutions with deep enough pockets to skirt the debt markets, according to Clarke at IPSX.

“I’m afraid we’ll see a lot of UK assets trade to overseas sovereign wealth and private funds. UK institutional capital [and] UK savers are losing their trophy assets again,” he said.