Investors Want Out of a $1.1 Billion London Property Fund

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Investors in a Schroders Plc real estate fund that owns some of London’s priciest offices are seeking to withdraw almost one-fifth of the 836 million pounds ($1.09 billion) pool as Brexit-related worries have mounted, people with knowledge of the matter said.

Some 150 million pounds in redemption requests at the West End of London Property Unit Trust have prompted restructuring talks that could result in a sale of the fund or a change of manager, among other options, said the people, asking not to be identified as the negotiations are private.

The fund has paid out the equivalent of 10 percent of assets to investors that submitted redemption requests in each of the past two years, the maximum level it is required to meet annually. It would be the third straight year it will hit that limit, the people said. The fund, called Welput, has been forced to sell buildings in order to pay investors seeking to pull their money, said the people.

Investors’ desire to exit shows wavering faith in London real estate, even though the city’s office market has proved resilient in the past two years and largely confounded expectations of a Brexit-induced slump. Publicly listed landlords trade at wide discounts to the value of their assets, which have held up as demand for office space has remained reasonably robust.

Archaic Structure

Investors in the Welput fund can withdraw their money annually and need to submit their redemption requests by September of every year. The investors are now in talks with Schroders and Grafton Advisors LLP, which manages the underlying assets, the people said.

The fund’s three largest investors, Alecta Pensionsforsakring OMS, PFA Pension A/S and Madison International Realty, who collectively hold about three-fourths of the fund, are lobbying for changes to reduce fees that could include simplifying its structure, they said. The current structure, with Schroders as fund management company and Grafton managing the actual assets, is seen as archaic and costly by some of the fund’s investors, the people said.

The internal discussions over the future of Welput have also prompted interest from outside investors that could bid for the fund’s entire portfolio, the people said. At least one investor is contemplating a bid for Welput’s properties if internal discussions result in a decision to consider an outright sale.

Danish pension fund PFA, which has about $113 billion in assets, is avoiding further U.K. real estate deals until after March because of the risk of a no-deal Brexit, Chief Financial Officer Anders Damgaard said in an interview Monday. The U.K. now looks “particularly risky” he said. Damgaard made the comments before the Welput outflows came to light.

Representatives for London-based Schroders, New York-based investment firm Madison and Swedish pension manager Alecta declined to comment. PFA did not return emails seeking comment on Welput.

Welput owns 10 central London office buildings with an average value of about 107 million pounds each, according to its website. The fund traditionally focused on buildings in London’s pricey West End districts but restructured in 2014 to allow it to invest in other areas including the City of London financial district and emerging neighborhoods such as King’s Cross and Clerkenwell.

Portfolio Sales

Schroders, which last month formed a joint venture with Lloyds Banking Group Plc to manage about 80 billion pounds of assets, is considering a wide range of measures and there’s no guarantee the negotiations will lead to radical changes such as a new manager or sale, the added.

In September 2017, investors holding 11.6 percent of Welput asked for their money back, according to the fund’s semi-annual report. The vast majority of these requests to cash out were not matched by new investors and were paid out in June this year using debt that will be repaid by the fund following the sale of a property in London’s Marylebone district, the filings show.

This summer the fund offered for sale 5-7 Carlton Gardens, the current London headquarters of KKR & Co., for 205 million pounds. The building, which will be vacated by KKR when it moves to a new development, has since been withdrawn from sale and could be retained for future redevelopment if redemptions can be halted, the people said.

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