Property Funds Pile Up Cash In Case Of Run Of Withdrawals

Giant commercial property funds are piling up mountains of cash as managers fear investors may rush to withdraw their cash if the economy dips.

City regulators have warned the funds to put investors first in case of another run on funds.

After the Brexit referendum last year, several multi-billion pound funds were forced to block payments to investors as they did not have enough cash to hand to pay them off.

With assets tied in property investments, the liquidity terms the funds offered were unrealistic, says watchdog the Financial Conduct Authority.

An investigation determined the terms were inappropriate for investing in property.

Cash reserves doubled by funds

While the FCA considers what to advise fund managers to prevent similar problems arising, five of the largest funds have reportedly increased their cash holdings to 20% of fund values.

They are concerned that the forthcoming General Election 2017 and Brexit talks could spook the markets again and spur another flood of investors cashing in and leaving the market.

Andrew Hook, portfolio manager at the £1.6 billion Aviva Investors Property, said: “We have deliberately held a higher cash weighting since the resumption of dealing last December. This is not out of line with most of our peer group funds.”

Other funds holding more than 20% in cash include Columbia Threadneedle’s UK Property fund, the CanLife UK Property fund and L&G’s UK Property fund.

Brexit fears triggered suspensions

Until the post-Brexit vote rush, property funds tended to keep around 10% of their value in cash, although Kames Property Income Fund has a war-chest thought to be at around a third of fund value.

In 2016, within a few days of the June 23 Brexit vote, seven funds worth £18 billion were suspended leaving investors unable to access their cash.

Investors feared commercial property values would drop as part of the fall-out from the referendum result, but this did not happen.

The FCA quickly launched an inquiry on the grounds property was difficult to sell quickly and prices could rapidly fall, leaving investors with large losses.

The conclusion was property funds did not hold enough cash to pay off investors in an emergency.

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