Another UK Property Fund Suspension Raises Liquidity Challenge Again

Tom Burroughes

13 October 2022

As a UK property fund shut exits this week to investors trying to withdraw cash, the saga raises further questions over whether types of fund vehicles are suitable ways to hold bricks-and-mortar assets.

This week suspended dealing in the £453 million ($502 million) CT UK Property Authorised Investment Fund and its feeder fund, CT UK Property Authorised Trust. The suspension took effect from 12 noon on 10 October 2022.

Columbia Threadneedle said it acted “due the amount of cash in the fund reducing to a level where future redemption requests would not be able to be met until an orderly sale of assets has completed.” The CT UK PAIF and its feeder fund will still be priced daily and will still be paid whilst dealing in the fund is suspended.

The episode, coming amid turbulence in UK financial markets, will remind investors of sagas, such as in the aftermath of the 2016 Brexit referendum, and a period during 2019, when some fund managers temporarily halted fund redemptions to manage liquidity in open-ended funds, for example.

Turmoil in markets such as in the government bonds (gilts) amid concerns about monetary policy, debt and pension funds’ financial status, have roiled sectors including property.

The Columbia Threadneedle entities are managed by Gerry Frewin and invest in physical UK commercial property. The fund is overweight the industrial sector and has minimal exposure to high street retail.

The fund “continues to maintain a high and sustainable income return” and said it has “significantly outperformed” the IA Property UK Direct sector over 12 months to 30 September 2022 owing to its “robust portfolio composition,” the firm said in its 11 October statement.

“What we are seeing is round two of UK property fund trading suspensions. The first round was specific to the funds that had significant pension exposure and was more of an isolated issue,” Oli Creasy, property research analyst at Quilter Cheviot, said in a note.

“However, what we are seeing today looks more like a general UK property market issue and the main Columbia Threadneedle (CT) UK property fund was suspended for redemptions until further notice,” Creasy said.

“Whether this precipitates other UK property fund suspensions across the industry is yet to be seen. But it is worth bearing in mind that this fund is relatively small at only £484 milion in size as of 31 August. For context, the biggest property fund in the market, L&G, is about £2 billion in size, so the CT fund is relatively small in comparison,” Creasy continued.

Creasy said the fund had 2.8 per cent of its assets in cash which is a “dangerously small number and heightens the risk of suspension.” The industry standard for cash as a share of assets is about 15 to 20 per cent, Creasy said.

“However, we believe that the CT fund managers will not have wanted to be at that level of assets in cash but were simply struggling to keep up with the pace of redemptions. One of the questions that the fund manager will have to answer is will it open up again?” Creasy said.

“The question on investor’s lips will be whether other funds are also facing the risk of suspension? The answer is maybe; there have been instances in the past when contagion has gripped this market, however, it isn’t always the case. Some of the other funds in the market are better capitalised (for example, L&G had >15 per cent in cash (as of 31/08/22) and therefore may be better positioned to cope with further redemptions,” Creasy added.

In March 2020 asset managers Janus Henderson and Kames Capital suspended dealings in their UK property funds, citing coronavirus-induced turmoil as a reason. The Financial Conduct Authority is said to be mulling the idea of restricting retail investors from open-ended property funds. The issue raises the challenge of giving mass-market investors access to illiquid assets that are supposed to offer superior risk-adjusted returns.