Material uncertainty on property valuations clears but fund suspensions 'likely to stay'

A number of funds across the IA UK Direct Property sector remain suspended after independent valuers instigated Material Uncertainty Clauses (MUCs) in the wake of the coronavirus pandemic, with billions of pounds of investor capital locked up in the vehicles since early March.

While fund suspensions remain in place, RICS has today (9 September) said that valuation uncertainty no longer applies to a number of areas of the UK property market, having been gradually removing MUCs from certain subsectors since early summer.

Recommending a "general lifting" of material valuation uncertainty, RICS has said there no longer remains the same material uncertainty in "all UK real estate", excluding "some assets valued with reference to trading potential" such as within some leisure and hospitality assets.

However, while the funds "suspended immediately" after MUCs were imposed in March, "it is very unlikely that they will reopen as quickly", warned Quilter Cheviot equity research analyst Oliver Creasey.

He explained that while the removal of the MUC allows the funds to reopen, they have no regulatory obligation to do so and the decision will be made at the discretion of the relevant asset manager.

Creasey said this decision "will be based largely on liquidation requests vs cash on hand", with the relative liquidity of funds playing a role in whether they will reopen as firms will be keen to avoid having to immediately suspend again due to outflows.

Funds in the IA UK Direct Property sector have suspended in waves in the past owing to liquidity issues, most notably in the wake of the 2016 Brexit referendum.

Ahead of reopening, funds have increased their cash weightings significantly in anticipation of outflows.

FCA eyes 180-day notice period for property fund redemptions

Creasey said: "The funds typically operate with [approximately] 20% of their assets in cash, or sometimes in liquid REIT shares, which means they can manage redemptions on all but the worst trading days.

"However, the funds have not been open to trading for nearly six months now, and there will be a backlog of trades that are put through as soon as they reopen.

"The problem funds have is working out how big this backlog is, and managers have been trying to ascertain their clients' intentions for some time.

"The issue is that in many cases it is not possible for investors to say for sure, not least because they don't know what price the funds will reopen at, and so how advantageous such a trade might be.

"The fund managers will be absolutely desperate to avoid a scenario where the fund reopens and then a week later is forced to close over liquidity concerns. That is why they may not rush to reopen until they have a good understanding of their clients' intentions, instead they may try to let others go first and assess the likely impact."

Creasey also noted that Quilter Cheviot expects that the £2.9bn AUM L&G UK Property fund to be one of the first to reopen.

He explained: "The fund is particularly well-capitalised, with over 27% in cash or shares, and also has one of the better property portfolios."

Conversely, Creasey said funds with lower cash weightings will be "less well-positioned" to reopen soon.

However, PA's sister title Investment Week understands that even open-ended property funds with high cash weightings are unlikely to rush to reopen in the face of potential upcoming risks, such as the end of the Brexit transition period and the Financial Conduct Authority's new rules.

RICS has been contacted for comment. 

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