UK Fund Managers Start Dumping Properties, Admit "Real Estate Needed Re-Pricing"

The uncomfortable moment of truth has arrived for property funds in the UK (and their investors). Following the initial tumble of the post-Brexit dominoes - eight major funds so far either gating redemptions or forcing massive haircuts on to investors who want out - contagion concerns even woke up Britain's regulators (and central bank) as fears of Bear-Stearns-esque forced liquidations spread; and now, as The FT reports, that is what has just started.

With every UK property fund knowing every other UK property fund needs to sell assets (real physical illiquid property) to meet cash calls (in their unreal faux-liquidity funds), the game-theoretical first-mover advantage has begun with Henderson Global Investors, which has begun offloading prime assets to provide liquidity to investors... (as The FT details)

But given the following chart as an example of the 'liquidity gap' between fund-level liquidations and the exuberant UK real estate market, things could get ugly very quickly...

(Click on image to enlarge)

Perhaps even more troubling is the reality that you sell what you can, not what you want to...

Property funds are expected to focus initially on disposing of “prime” assets, which will be easier to sell in uncertain markets, agents said.

Investors are more worried about properties in sectors thought to be vulnerable to Brexit, such as London offices.

Which suggests the lower-quality assets could be severely impaired, just as Richard Divall, head of cross-border capital markets at the property advisers Colliers, admitted:

"Brexit has caused short-term panic and stalling to most of the UK market, but... UK real estate needed re-pricing — the world looked at the UK as too expensive nine months ago."

And with managers forced to liquidate some of their best holdings to raise cash, the potential for fire-sale prices is very real (once again that chart above suggests the mark-to-market impact on real UK property alone could be significant), and that is why, as we previously noted, the Bank of England has been mulling a bailout...

The Bank of England's 'strawman' here is likely the first step down the road of a full-blown bailout - a slush-fund to promise to buy UK property from the funds... with the hope that once they even mention it, investors will stop their selling and pile back in.

Of course, we have seen and heard all of this before (about 9 years ago) when any number of government backstops, bailouts, partnerships, and direct buying did nothing to stop the contagious collateral chain collapse following the gating and liquidation of two Bear Stearns funds. We will never learn and this time is no different for as one major fund manager warned...

“This throws up all sorts of questions about the suitability of daily-traded, open-ended property funds that are giving investors access to an illiquid asset.”

But all the time investors believe a central bank has their back, this is not a problem... until it is THE problem, and the walls come thundering down.

It would seem monitoring the price-discussions of 440 Strand (£175m in 2014 shooting up staggeringly quickly to £220m pre-Brexit) is as good an indicator of crisis as any... and perhaps the least manipulated (for now).