Three UK asset managers have said they are unable to handle heavy demand from investors seeking to withdraw from property funds, in another sign of how an accelerating decline in government bond prices is forcing pension funds to reallocate holdings.
Schroders said it will make some redemptions originally due on Monday as late as July next year, while Columbia Threadneedle said volatile market conditions had forced it to switch from daily to monthly payouts. At the same time, BlackRock also imposed new restrictions on withdrawals.
This once again highlights how funds based on hard-to-sell assets struggle when the volatility that has stalked stocks and bond markets all year pushes investors to demand cash back in a hurry.
A liquidity crisis in the UK last week, sparked by plunging gilts prices, has worsened the situation for some asset managers, with defined-benefit pension schemes, which are major investors in UK institutional real estate funds, rapidly selling a broad range of assets to meet demands for collateral.
“It’s a fairly feeble market and you’ve thrown in some volatility. Shifting to monthly redemptions [from daily] reduces your need to firesale assets,” said one adviser to property funds.
Calum Mackenzie, investment partner with Aon, the pension consultants, added, “I think this is part of a longer-term trend by pension funds to [cut risk] by selling off the less liquid assets . . . This trend is now being exacerbated by last week’s short-term liquidity rush by pension funds.”
UK pension funds have been cutting real estate holdings for several months as rising interest rates and slowing activity have weighed on the property market. Tumbling prices of UK government debt have also increased the proportion of funds’ portfolios in real estate, prompting some to reduce their exposure.
These forces have intensified at a point when conditions in private markets including equity, real estate and credit, are already fraught. A sharp deterioration in lending conditions has made it difficult to get deals done in unlisted assets, according to industry participants.
The £2.7bn Schroders Capital UK Real Estate fund received redemption requests worth £65.3mn in the second quarter of this year, which were due to be paid by October 3. Schroders has paid £7.8mn towards meeting the withdrawal requests and said the outstanding balance would be deferred until “on or before” July 3 next year, in line with rules that allow it to push back redemption requests 24 months.
“It is expected that the deferred redemptions will be paid following successful completion of future asset disposals,” said Schroders.
It is in the process of selling Jubilee House, a tower block redevelopment in Stratford, east London, that it bought in 2013 for £11.9mn. Schroders has signed a contract to sell it for £63mn in a deal that is expected to be completed by April 2023.
Columbia Threadneedle has also introduced new arrangements for redemptions for the £2.3bn Threadneedle Pensions Pooled Property fund, which means investors will be able to make withdrawals on a monthly basis rather than daily, citing “liquidity constraints resulting from the recent market volatility and a subsequent increase in redemption requests”.
BlackRock, the world’s largest asset manager, has also imposed redemption restrictions on the £3.5bn BlackRock UK Property fund after receiving significant withdrawal requests in the second quarter.
These restrictions echo previous crises when asset managers imposed “gates” to prevent investors from making withdrawals from daily traded property funds in the wake of the Brexit vote and during the early months of the coronavirus pandemic in 2020. In both of those instances, professionals valuing assets held by the fund struggled to put an accurate price on commercial real estate projects.