The fire sale begins as property funds face rapid redemptions in the UK

The fire sale begins as property funds face rapid redemptions in the UK

Property funds are dumping assets worth more than £1bn onto the London market as pressure mounts to meet redemption requests, with estate agents warning they will have to accept big discounts to sell.

British property funds, including vehicles managed by Schroders, CBRE Investment Management, Legal & General Investment Management, M&G and Abrdn, are marketing at least 18 commercial assets together priced at around £1bn in the capital, according to estate agents.

Fund managers insisted the sell-off was triggered as they rebalanced portfolios on behalf of clients, but estate agents said the level of activity was much higher than normal.

“You might have that many UK fund sales in a year. The fact that we have so many on the market at the same time is unusual,” said one commercial estate agent, who added that the bulk of the properties have come on the market in the past two months.

Funds have been under increasing pressure to meet investor redemption requests from institutions including pension funds, which are dealing with the fallout from former chancellor Kwasi Kwarteng’s “mini” budget in September.

The chancellor’s promise of £45 billion in unfunded tax cuts – now almost completely scrapped – sent gilt yields soaring, making commercial property a relatively less attractive asset.

The intervention also forced pension funds using so-called liability-driven investment (LDI) strategies to sell off assets including property fund holdings to meet collateral requirements.

Investors withdrew £184m in October from a selection of retail and institutional property funds tracked by Calastone, the biggest global fund trading provider, more than double the £89m withdrawn from the vehicles in September.

The accelerating pace of withdrawals has forced funds to act. M&G and LGIM are the latest funds to postpone withdrawals this week on two institutional property funds, along with Schroders, Columbia Threadneedle and BlackRock to limit redemptions.

Michael Barrie, head of fund management at LGIM Real Assets, said the fund acted in response to “exceptional market conditions” to protect clients.

M&G said it had acted because redemption requests exceeded cash balances as a result of some defined benefit pension customers needing to either raise liquidity or rebalance their portfolios, as a result of volatility in the public markets. It added that the fund’s underlying assets were still performing well.

The company noted that two commercial properties it had on the market in central London, valued at a combined £111m, were not linked to the gated fund.

Columbia Threadneedle said it had “ongoing sales and purchase pipelines” across its commercial real estate business.

Funds now have to sell into a very challenging market to free up cash and meet redemption requests.

Commercial property sales have dried up as investors wait for prices to adjust to the new reality of higher interest rates and the perception among buyers is that anyone selling today is under pressure.

“We certainly saw some forced sellers, some people have to cut their hair 10-15 percent [on price]said Neil Slater, head of real assets at Abrdn.

“You’re going to have some investors who have to sell for clients – either because of liquidity needs or strategic allocation changes – and that’s playing out now,” he said, adding that retail redemptions have not been as high as many had expected and the company’s property funds continue to perform as usual.

Abrdn’s real estate funds currently have almost a fifth of their value in cash as a buffer against redemption.

LGIM sells block called Senator in City of London for £157.3m © Carmen Reichman/FT

The two biggest sales marketed by UK funds are office buildings in prime London locations: Schroders is selling Wenlock Works in Shoreditch for £170m and LGIM is selling a block called Senator in the City of London for £157.3m.

Both have been for sale since before the “mini” budget, but the commercial estate agent expects both will now have to accept offers well below the asking price. The asset that LGIM is selling is not held in the fund that slowed redemptions, but in a separate Limited Partnership structure.

“People who are willing to spend money want to know they are buying from a motivated supplier [because] they try to take advantage of the stresses and strains out there. . . They are focused on these fund sales because the suppliers are under pressure,” he said.

“It is a very stressful and difficult time for the fund managers [but] part of the healing process of these declines is the forced sale, which reprices the market and allows you to move on, he added.

Schroders said its UK property fund “remains focused on divesting assets where the business plan has been completed and, just as importantly, reinvesting the proceeds and targeting assets where performance can be actively improved by the team”. It added that it expected “strong demand” for properties it was marketing in the capital.

CBRE IM declined to comment.

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