At Least $13 Billion of Investor Cash Is Frozen in U.K. Property Funds

(Bloomberg) -- U.K. property funds have seized up as tumultuous markets threw doubts over real estate valuations, leaving about 11 billion pounds ($13 billion) of investors’ cash locked away.

The country’s biggest asset managers including Standard Life Aberdeen Plc and Legal & General Group Plc have frozen withdrawals from funds holding offices, malls and warehouses as the regulator on Wednesday warned of a “material uncertainty over the value of commercial real estate.” The managers said the coronavirus-fueled turmoil made it virtually impossible to keep the funds open.

“A fair and reasonable valuation of commercial real estate funds cannot be established” the U.K.’s Financial Conduct Authority said in a statement. “As a result, some managers of open-ended CRE funds have temporarily suspended dealing in units of these funds and others are likely to follow for the same reason.”

Financial markets continued to spasm Wednesday, with U.S. stocks plunging toward levels that halt trading, as the economic fallout from the pandemic outpaces the massive response from governments and central banks.

Real estate assets can take months to sell, meaning prices take longer to adjust to market shocks than other assets because there are few transactions on which to base valuations. New rules brought in after the 2016 U.K. vote to leave the European Union, which triggered a run on property funds, will soon oblige managers to halt transactions when there is uncertainty over asset values.

“It will be frustrating for some, but one would hope that any investors who were uncomfortable with the possibility of property fund suspensions would have left the asset class by now,” said Darius McDermott, managing director of FundCalibre. “Those that are left should be investing for the long term.”

Janus Henderson said the suspension of its U.K. Property PAIF fund is intended to safeguard investors’ interests as the pandemic roils markets. It cited the new rules from the FCA, which start in September, in announcing the freeze, and gave no estimate for when it would be lifted.

The Kames Property Income Fund’s suspension was prompted by “continued market volatility and uncertainty for property funds” that began in the U.K. with the Brexit referendum and has escalated this year on the virus outbreak, Kames said in an emailed statement.

The suspensions come three months after M&G Plc halted its 2.5 billion-pound flagship real estate fund amid heightened political uncertainty and a worsening crisis in Britain’s retail industry that was battering commercial landlords. The M&G Property Portfolio fund remains frozen while the firm sells assets to raise the cash it needs to meet withdrawal requests.

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