Commercial property funds & the bouncing pound
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Last week markets were left somewhat shaken by seven commercial property funds freezing their assets to stem the panic flow of money out of London.
But a political and economic week in a post-Brexit world is a long time.
Last week saw the first visible signs of volatility post-referendum, but this was not totally unexpected. A lot of the panic that led to investors hastily trying to extract their funds from many commercial property funds was based around concerns over both political and economic uncertainty.
Ironically this reaction, rapidly followed by the freezing of funds by Standard Life, Aviva Investors, Henderson, M&G, Columbia Threadneedle and Canada Life, can end up creating a Catch 22, where the inability to withdraw funds causes further unease in investors.
Since then, we started this week with the assurance of knowing who the new UK Prime Minister would be, at least in the immediate future. We also saw the pound bounce up against both the USD and the Euro after the Monetary Policy Committee’s (MPC) Mark Carney announced that interests would remain at 0.5% as they are for now – at least until August.
We then closed the week finding out exactly who has what job in a major cabinet reshuffle, and with the new Chancellor of the Exchequer Philip Hammond’s assurance that he saw no need for an emergency budget in the wake of the Brexit result. Like we said, a week can be a long time.
With all the change and turbulence, it’s not surprising some are feeling a little shaken by recent events, hoping for some calm and order. But as much as the property market drop may have in part been triggered by uncertainty over Brexit, it is possible that it’s recovery will come about slowly through those same unknown quantities becoming known.
Yes, we are likely to see a temporary drop in property value as Carney stated today, but this is unlikely to be sustained, as Prime Minister Theresa May’s new government takes shape and new trade agreements are discussed and formulated.
In fact, the short term impact this volatility has on real estate, could present investment opportunities for some, as these valuable assets become inherently more attractive to acquire. Though it may take some time for the markets to settle, our withdrawal from the EU as it currently exists does not change the fundamental value of this asset class.
The lowered value of the pound will also encourage many overseas investors to “snap up a bargain” whilst they can. By playing a long game, property values should rise again in time, giving those who do invest a healthy profit.
There are of course those who were already invested that are feeling a direct impact of the fund freeze. Amongst them are the traditional financial institutions who may have around 55% of their core capital based on commercial property.
Having their main financial ‘safety net’ temporarily out of reach could make them increasingly nervous about volatility and any subsequent movement of assets. This could lead to many financial institutions tightening their requirements for small to medium businesses seeking loans from them at an economically challenging time.
Fortunately, the UK has a strong Alternative Finance sector to pick up the slack. Their very nature (aside from AltFin companies dealing directly in property investments) means they are much less likely to be directly affected by the current volatility surrounding property funds.
It also means that those SMEs who require business loans to enable them to expand and grow, still have a broad and healthy spectrum of funding options they can consider. From crowdsourcing to crowdfunding and B2B loans, there are several possibilities for strong, determined entrepreneurs to get the monetary support they are seeking to aid their continued success.
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A growing number of institutional lender are redirecting their funds, to provide finance to UK SMEs.
CODE Investing has entered into a strategic collaboration with City of London Group to originate SME loans
CODE Investing has entered into a strategic partnership with BNP Paribas Asset Management to originate SME loans.