World Economy

Echoes of 2008 Financial Crisis as UK Funds Freeze Assets

Echoes of 2008 Financial Crisis as UK Funds Freeze AssetsEchoes of 2008 Financial Crisis as UK Funds Freeze Assets

When reality dawned, the reaction was swift. For one corner of the UK investment industry, it’s not clear where it will stop.

Funds investing in commercial property, among the most popular last year, had started to show vulnerability in the months before Britain’s June 23 referendum on leaving the European Union. Withdrawals accelerated as opinion polls turned in favor of the “Leave” campaign, driven by concerns that international companies might shut or scale back London operations even if financial markets and betting odds suggested that Brexit was unlikely, Bloomberg reported.

At noon on Monday, just 11 days after the referendum result shocked the world, Standard Life Investments declared it had suspended its UK Real Estate fund as people tried to get their money back. By Thursday afternoon, seven funds together overseeing about £18 billion ($23.4 billion) had shut the door to prevent unnerved customers forcing fire sales of offices, shopping malls and warehouses.

“As soon as Standard Life suspended their funds it caused contagion,” said Jason Hollands, managing director at investment firm Tilney Bestinvest. “The key point here is no one really knows where UK property prices are going.”

 Fault Lines

“We don’t know how deep the fault lines run,” said Laith Khalaf, senior analyst at Hargreaves Lansdown, which sells funds to individuals in Britain. “The mark-down in asset prices is really an educated guess, and it may not be borne out by real-world transactions, for better or worse.”

To protect from a sudden surge in withdrawals, funds have a proportion of their assets in cash, especially if the investments are in something that takes time to sell such as office blocks. Some property funds were more than 20% cash before the Brexit vote. Others, including the £4.4 billion Property Portfolio at M&G Investments, had just 7.7%. It was too late for funds to raise more cash.

At the back of everyone’s mind from the regulator to the chief executives of the UK’s largest asset managers was the 2008 financial crisis. Real-estate funds were forced to freeze assets and contributed to a slump in property prices in Britain of more than 40% from their peak.

 Panic Strikes

Standard Life, in Edinburg, had reluctantly suspended its £2.9 billion UK Real Estate fund. About 13% of the fund was liquid, but with no let-up in withdrawals its managers froze the assets on July 4 to preserve remaining cash and avoid having to sell holdings on the cheap. It gated a similar property fund during the 2008 crisis.

Panic accelerated outflows. As the Financial Conduct Authority requested information from the funds sometimes hourly, its new chief, Andrew Bailey, told journalists it was time to look again at the design of illiquid funds sold to individuals. On Tuesday morning, Aviva Investors’ £1.8 billion Property Trust was the second to succumb to redemptions, quickly followed by Henderson, M&G, Columbia Threadneedle and Canada Life.

In a bid to avoid the same fate, Legal & General Group Plc and Kames Capital have cut the value of assets by as much as 10 to 15%. Aberdeen Asset Management has gone one step further and suspended its fund until Monday to give some investors time to reconsider their sell orders after they cut their fund’s value by 17%.

The “withdrawals to try to avoid fire-sale type of liquidations have put market attention on the 45% foreign participation within those funds,” Morgan Stanley analysts including Hans Redeker said in a note on Wednesday. “It underlined the significance” of sales of pound-denominated assets by overseas investors.

As the dust settles and comparisons are drawn with 2008, firms that froze assets have bought time to assess the damage from the referendum. Some have already engaged real estate brokers to look at which assets could be sold.