More than £10bn of investors' money became locked in open-ended UK property funds from 17-18 March and remains so at time of writing (19 March), as the coronavirus pandemic caused independent property valuers to declare a "material uncertainty of valuations".
To date, nine property funds and their feeder funds have suspended trading; fund houses include Aberdeen Standard Investments, Aviva Investors, BMO Global Asset Management (GAM), Janus Henderson, Kames Capital, Legal & General Investment Management, and Columbia Threadneedle Investments.
Each of the suspensions has been attributed to independent property valuers, including CBRE and Knight Frank, adding a 'market uncertainty clause' to all valuation reports due to the unprecedented circumstances caused by the coronavirus pandemic.
That clause informs fund managers that the valuer is attaching "less weight" to previous market evidence for "comparison purposes" and that given the current situation "less certainty - and a higher degree of caution - should be attached to [the] valuation than would normally be the case".
Nick Knight, head of UK valuations at CBRE, described it as a requirement to "draw our clients' attention" to this uncertainty, but that valuers will continue to "provide considered valuations based on professional judgment and taking into account all relevant available data".
All of the fund suspension notices have cited the issuance of the market uncertainty clause as a catalyst for ceasing trading, while pointing to soon-to-be implemented FCA rules that require a fund to suspend trading if material uncertainty applies to more than 20% of a fund's immovable assets.
At the time of writing, the two fund houses that had not suspended their property funds were Royal London Asset Management (RLAM) and Canada Life Investments.
When approached for comment, a spokesperson at RLAM said: "We are reviewing this and speaking to the regulator about this. Unless there are any regulatory requirements to do so, we do not currently have any plans to close our property funds.
"The Royal London Property fund operates monthly dealing and pricing and its clients are long-term institutional investors, such as pension funds, who are able to take a long-term view on their investments."
While the 20% rule is not in place, it is due to come into force in September 2020 and Ryan Hughes, head of active portfolios at AJ Bell, noted that it has "effectively been adopted by asset managers in the face of such major economic turmoil."
Canada Life Investments declined to comment.
As a result of the suspensions, Square Mile has suspended its recommended ratings on both the Janus Henderson UK Property PAIF and the L&G UK Property fund but will continue to monitor the funds while they remain suspended.
The statement from BMO GAM also highlighted that "the suspension is not related to any liquidity event", referencing persistent concerns about the asset class, most recently highlighted by the still-suspended M&G Property portfolio, in which dealing has been halted since December 2019.
Dzmitry Lipski, head of funds research at interactive investor, said: "History does repeat itself and questions again how appropriate open-ended funds are to gain exposure to illiquid assets such
Adrian Lowcock, head of personal investing at Willis Owen, describes it as yet "another crisis for the open-ended property sector", while Rebecca O'Keeffe, head of investment at interactive investor, said: "No structure is perfect, but the closed-ended structure of investment trusts is far superior when it comes to investing in illiquid assets such as commercial property."
She added: "It is very reasonable that the combination of extreme markets and extraordinary social circumstances make it exceptionally difficult to value property, in particular on the retail or hospitality side.
"But we still think an open-ended fund is the wrong way to gain exposure to this asset class. We would caution against panic selling, but at least with investment trusts if you do need to head for the emergency exit, you can."
However, no investment product is without its risks, and Lipski noted that while closed-ended funds do offer greater liquidity, they "sometimes come with larger drawdowns as their prices can be influenced by external factors" and "discounts will likely be in for a volatile ride".
At the time of writing, multiple investment trusts were trading with discounts in excess of 50%, with BMO Commercial Property trust trading at a 60.1% discount compared to its three-year average discount of 4.3%, according to data from the AIC.
For those invested in the funds currently suspended there is "nothing they can do now but wait it out", according to Hughes, who highlighted the duration of the M&G closure indicates "it is not a quick task to offload large property assets in order to generate cash", adding that "current market conditions will only make that harder".
Cedric Bucher, CEO of Hearthstone Investments, does not believe there are valuation concerns for its open-ended TM Home Investor fund, citing a "relatively high liquidity" in the residential property market compared to the commercial market, which has seen the greatest suspensions.
He explained: "Residential property does not havespecific challenges such as those faced by retail or leisure commercial property."
Last week's spate of suspensions, combined with M&G's recent trading halt and memories of the 2016 domino-effect, all total to a hesitance surrounding the asset class, summarised by Hughes:
"With the FCA continuing to look at the appropriateness of illiquid assets in daily traded funds, surely this must spell the end of such structures to avoid damaging the confidence of investors in the funds industry."