13 July 2016

High profile property funds suspend trading (but Carbon portfolios unaffected).

For anyone taking an interest in the recent news around Brexit, you will be aware of the temporary suspension of withdrawals from several well-known property funds. Given stock markets appear to have stabilised post Brexit, why is property having a wobble?

Well, firstly, you’ll be pleased to hear that Carbon portfolios are not affected by restrictions on what are often referred to as ‘bricks and mortar’ funds, but it’s interesting to see how the restrictions work.

Compared to, say, cash or shares, property is relatively illiquid. This means that it can be hard to get your money back out. When we look under the bonnet of these funds, investor capital is pooled together and invested directly in a portfolio of commercial property – in, for example, offices, shopping centres and industrial units. Following the Referendum, many investors are requesting their money back from these funds, but due to their illiquid nature, satisfying all these requests at once would necessitate selling large chucks of property at declining prices. In times like this, funds have the authority to suspend trading.

This is obviously problematic for investors wishing to recover their investments, who are often left waiting for an unknown period of time before the fund managers remove the restriction. Funds are temporarily closed to withdrawals to avoid managers having to sell property in a hurry, which would mean that they would have to accept a lower price, which in turn would penalise the remaining investors. In effect, delaying withdrawals (buying time) allows the manager to fund withdrawals through normal cashflows, rather than being forced to sell property at a bad time.

At Carbon, our approach is quite different to the ‘bricks and mortar’ model above. Put simply, we believe that it is important to have access to capital at short notice and property is treated no differently. By investing in Real Estate Investment Trust (REITs), our clients own shares in a global spread of highly- liquid listed real estate companies. This gives access to property investment through a property company, rather than being invested directly in the property itself. REITs are valued daily instead of, say, once a month (which is typical of traditional ‘bricks and mortar’ funds) and can be sold at the market rate whenever investors decide to withdraw funds. This still ensures good property investment exposure, but with far greater accessibility to capital.

For these reasons, anyone invested in Carbon portfolios is not affected by restrictions imposed on ‘bricks and mortar’ funds.

This blog post was written by Iain Harper, a senior in Carbon’s client services team. You can view Iain’s profile here.

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