US fund manager BlackRock has further delayed redemptions on its £3.5bn UK property fund as it seeks to slow a rush for the exit by big investors worried about difficult market conditions.
The fund targets institutional investors and allows quarterly withdrawals only. BlackRock initially blocked redemptions due for payment in September after a high number of requests over the summer. It will now delay withdrawals that were due at the end of December 2022.
According to a person familiar with the group’s plans, it is looking at a number of ways to rebalance its portfolio and free up cash for investors, including “expediting” sales of underlying property assets that were already in the pipeline. BlackRock declined to comment.
Other fund managers including M&G, CBRE, Schroders and Columbia Threadneedle have all restricted withdrawals from UK property funds in recent months. However, Legal & General Investment Management said on Wednesday that it had lifted the block on redemptions on its £3.7bn Managed Property institutional fund. “The fund is no longer operating its deferral policy,” the company said.
High demand for redemptions has been driven by shifts in investment strategy in the pensions industry, who are among the UK’s biggest institutional investors. Many defined benefit schemes have much improved funding positions thanks to rising interest rates and are therefore looking to offload higher-risk assets like property.
A number of schemes have also re-evaluated more illiquid investments since the crisis caused by the UK government’s ill-fated “mini” Budget in September. Poor performance by their equity and debt portfolios in 2022 also means that many have too high a proportion of less-liquid holdings and must now rebalance their investments.
“The reopening of these funds depends on defined benefit schemes and their appetite for illiquid assets,” a fund manager said.
Funds are trying to sell properties at a time when asset valuations are falling fast because higher interest rates have increased borrowing costs for buyers. By the start of November, property funds were marketing more than £1bn of assets in London.
Average UK commercial property values fell 17 per cent over the six months to November 2022, according to MSCI. Warehouses, which make up almost half of BlackRock’s UK Property fund, lost 23 per cent of their value in the period.
Tom Leahy, head of real estate research in Europe at MSCI said difficult market conditions had made property funds reluctant to sell and instead they were choosing to wait and hope for improvements later this year.
“Early numbers show transaction volumes have fallen dramatically in the fourth quarter. Those are tricky conditions to navigate and certainly not conditions in which you would want to be a forced seller,” he said.
The BlackRock fund, which has been running since 1982, focuses on UK industrial property and offices in London’s City and West End districts as well as the rest of the country. Its performance was worse than rivals in the year to the end of December.
Other funds have no plans to restart redemptions yet. M&G said its £4.6bn Secured Property Income fund, which is largely owned by defined benefit pension schemes, is still deferring withdrawals.
Osmaan Malik, head of real estate at UBS’s investment research arm, said: “It’s not a surprise this has happened — interest rates have moved a long way in a short period of time and the impact has been the repricing of assets. It makes sense that investors would want to pull money out. What will it take for investors to come back? Rates need to settle.”