Mind the gate on UK commercial property

Liquidity is defined as the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price.

Investors in UK commercial property funds have been given a lesson in liquidity over the last ten days, as the gate was abruptly shut to those looking for their money back. The BREXIT result sparked concerns about the outlook for the UK economy and the commercial property sector, which in turn caused a wave of selling. With investors all looking for the exit at once, liquidity dried up as cash reserves were depleted and so the gates were shut to those looking to get out.

In the face of increased sell orders, fund companies have also been forced to mark down the value of their assets, with Aberdeen Asset Management reportedly cutting the value of their UK commercial property fund by 17%. Of course, this all serves to feed investor panic and increased selling pressure at a fund level will force fund companies to offload the underlying properties at the very time everyone else is trying to sell. A lethal cocktail.

The funds in question are open ended funds with daily pricing, and therein lies the problem. The availability of daily pricing on a fund provides the illusion of liquidity, but the underlying liquidity is a function of the asset that makes up the fund. In this case the funds are made up of illiquid commercial property. The panic selling we have seen suggests that many so-called long term investors missed this point.