NN Investment Partners Keeps Faith in Global Real Estate

Shanny Basar

NN Investment Partners, the Dutch asset manager, said global real estate will continue to benefit from the search for yield despite three UK listed commercial real estate funds suspending trading following the UK vote to leave the European Union.

Valentijn van Nieuwenhuijzen, head of multi asset at NN IP, said at a briefing today that global real estate remains fundamentally strong although there may be issues in the UK market following the vote for Brexit. NN IP has a small overweight on global real estate.

van Nieuwenhuijzen said: “In a low growth, low yield environment, real estate is a beneficiary of the search for yield theme. Fundamental support from stronger labour and housing markets is still in place.”

Today M&G Investments became the third UK manager to temporary suspend trading in the £4.4bn ($5.7bn) M&G Property Portfolio and its feeder fund. M&G Investments said in a statement: “Investor redemptions in the fund have risen markedly because of the high levels of uncertainty in the UK commercial property market since the outcome of the European Union referendum.”

The asset manager added this will give time to raise cash in a controlled manner and ensure that any asset disposals are achieved at reasonable values. The property portfolio invests in 178 UK commercial properties across retail, industrial and office sectors for UK retail investors and had assets of £4.4bn the end of last month with no borrowings.

In addition Aviva Investors suspended trading in a similar £1.8bn fund today and yesterday Standard Life stopped redemptions from a £2.9bn commercial real estate  fund.

The Investment Association, the trade body for UK-based fund managers, said in a statement yesterday: “Fund investors’ interests are protected in a number of ways and the ability to suspend redemptions is one of the most important tools because it prevents fund managers from being forced to sell, in this case property interests, too rapidly and helps them achieve a better outcome for all their clients.”

The IMA added that there are stringent rules around fund suspensions from the UK Financial Authority which include a review at least every 28 days and the need to inform unitholders of how they may obtain information.

Andrew Bailey, head of the FCA, said at a press conference today for the Bank of England’s latest Financial Stability Report that the structure of UK property investment funds may need to be reconsidered.

Mark Carney, governor of the Bank of England, said at the press conference that it is now more likely that adjustments in commercial real estate could tighten credit conditions for UK businesses.

“Foreign flows of capital into commercial real estate fell 50% in the first quarter of 2016, transaction volumes have fallen further during the second quarter, and share prices of property REITs dropped sharply following the referendum,” Carney added.

The Bank of England said foreign investors accounted for around 45% of the value of total transactions UK commercial real estate since 2009. More recently, share prices of real estate investment trusts have fallen sharply, reflecting the risk of future marked adjustments in commercial real estate prices.

“Any adjustment in commercial real estate markets could potentially be amplified by the behaviour of leveraged investors and investors in open-ended commercial property funds,” added the Bank of England.

Despite the suspension of the UK funds, NN Investment Partners said Brexit is unlikely to morph into a systemic crisis similar to the Lehman bankruptcy. The fund manager retained its underlying conviction of a preference for return-generating assets such as equities, real estate and spread products.

van Nieuwenhuijzen said: “Brexit is certainly a political crisis but not automatically a financial system crisis.”

However, as a result of Brexit NN IP lowered its expectations of earnings growth in the Eurozone from 4% to 2% this year and from 8% to 3% for 2017.

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