Suspension of UK real estate funds highlights liquidity benefits of ETFs

Jan 25th, 2023 | By | Category: Alternatives / Multi-Asset

Several large investment houses have frozen trading in their UK-focused real estate funds as swathes of investors have sought to exit the sector recently.

Suspension of UK real estate funds highlights liquidity benefits of ETFs

UK property funds have faced an uncertain and volatile period lately.

The move prevents investors from withdrawing their money as managers seek to sell off parts of the portfolio to accommodate the backlog of redemption requests.

Selling illiquid assets such as property requires sufficient time to prevent managers from being forced to dispose of assets at very low prices.

According to an article in the Wall Street Journal, BlackRock has deferred meeting third-quarter requests for redemptions from the £3.5 billion BlackRock UK Property Fund. The fund is able to defer redemptions by up to two years.

M&G, meanwhile, has extended a temporary deferral for its £4.6bn Secured Property Income Fund, while Schroders has also deferred most of the redemption requests for its 2.0bn UK Real Estate Fund until potentially as late as July 2023.

The Wall Street Journal reported that these investment houses had shut the door on investors following significant redemption requests, especially from some pension clients that needed to raise cash or rebalance their portfolios in the wake of market volatility in 2022.

The deferred redemptions echo actions taken in 2016 by Standard Life, Aviva Investments, and M&G which froze trading in their UK real estate funds following a rapid increase in redemption requests directly following the result of the Brexit vote.

While real estate remains an important portfolio component due to its historically low correlation with other asset classes and its ability to offer significant income, the forced lock-up of investor wealth within these funds serves as a reminder of the potential issues with open-ended funds whose underlying assets are relatively illiquid.

Closed-end property funds do provide investors with the chance to sell out during market upheaval, although widespread selling likely serves to depress share prices and widen discounts in times of stress. Indeed, a number of closed-ended property trusts traded at discounts in excess of 10% to their net asset values in the days directly following the Brexit vote.

ETFs, however, differ from both traditional open-ended and closed-end funds. They combine the best features of an open-ended fund with the tradability of a listed closed-end fund. But whereas closed-end funds, such as property trusts, can trade at significant discounts to NAV during times of market stress, ETFs will trade much closer to their actual NAV thanks to their investment in listed real estate investment trusts (REITs) and securities, coupled with the unique creation/redemption process underpinning the ETF structure.

When secondary market liquidity dries up, a closed-end trust would begin to trade at a discount to its NAV. By contrast, in this scenario, the ETF’s Authorised Participant would redeem units of the fund in line with investor demand, thus keeping it trading in sync with NAV. Of course, real estate ETFs are not immune to falls in property prices and it must be noted that their underlying holdings may trade at discounts. But, nevertheless, the two complementary layers of liquidity – namely the primary and secondary markets – at least give investors the ability to trade out of a position whenever they want in most conceivable scenarios.

BlackRock offers several property ETFs in Europe targeting listed real estate securities in different regions of the world. These include the $1.4bn iShares Developed Markets Property Yield UCITS ETF (IDWP LN), which has an expense ratio of 0.59%; the $500 million iShares US Property Yield UCITS ETF (IDUP LN), 0.40%; the $1bn iShares European Property Yield UCITS ETF (IPRP LN), 0.40%; the $500m iShares UK Property UCITS ETF (IUKP LN), 0.40%; and the $400m iShares Asia Property Yield UCITS ETF (IDAR LN), 0.59%.

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