London - It took seven working days from the result of Britain’s shock vote to leave the European Union for Standard Life Investments to freeze withdrawals from its £2.9bn UK real estate fund. For investors wanting to get money out, the wait is likely to be a lot longer.
Standard Life’s decision, soon followed by six other managers of more than £15bn of property assets, was taken to avoid fire sales that helped wipe 40% from commercial real estate prices during the financial crisis and shuttered many funds permanently.
Managers including Germany’s KanAm’s Grundinvest and Credit Suisse Group’s Euroreal are still unwinding properties years later.
"Once gates are introduced, they can be challenging to reverse," Fitch Ratings analysts led by Alastair Sewell wrote in a note this week. Most German funds frozen during the 2008 crisis "were unable to reopen to redemptions and eventually entered a liquidation process that is still ongoing."
While such a drastic outcome is viewed as highly unlikely in London, investors in the real estate funds face significant losses if they want their money back immediately. Aberdeen Asset Management told some holders of its £3.2bn fund that they can choose to be repaid on Monday - if they’re willing to accept a 17% discount.
The payments are possible because the Aberdeen fund, along with frozen funds operated by Henderson Global Investors, Columbia Threadneedle Investments and Standard Life, still has a positive cash balance, according to people familiar with the matter.
They chose to halt withdrawals before using up liquidity in order to manage a more orderly sales process and protect holders wishing to remain invested, the people said, asking not to be identified because the details are private.
"The funds think they have a pretty free reign on how long they can maintain the redemption freeze, and they will be saying: we will hold our line on that for as long as we think is sensible," said Russell Gardner, a partner and UK leader of real estate at consultant Ernst & Young in London.
"They will be looking for some real transactions out there that show the volatility in the market is a short-term thing."
Managers of the frozen funds have already asked brokers to assess their portfolios and highlight the best sales candidates, according to Nick Braybrook, partner and head of City of London capital markets at broker Knight Frank. As much as £5bn of property could ultimately be offered to meet the withdrawal requests, Mike Prew, an analyst at Jefferies, wrote in a note on Thursday.
There are willing buyers waiting in the wings anticipating bargains, although there is no clear evidence yet that the value of assets has fallen, according to Manish Chande, senior partner at Clearbell Capital, a private equity real estate fund manager.
International investors benefiting from the devaluation of the pound will help bolster demand, Chande said. These buyers tend to seek larger buildings, which managers may not want to sell, and so deals for bundles of smaller assets are more likely, he said.
"We approached one of the funds on the back of the freeze," said Chande, whose firm manages more than £1bn of real estate.
"There will be some good opportunities, but I don’t think there is real distress. Overall there will be maybe 5% discounts."