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Brexit exemplifies Liquidity needs for Trust Market

Thursday, July 14, 2016

Brexit exemplifies Liquidity needs for the Property Trust Market worldwide

PrimaryMarkets’ Game Changing Solution

As every investor knows when they buy into an unlisted property Trust/Fund they must carefully weigh up the lack of liquidity. Usually, the only liquidity event available to investors occurs when the fixed term of the Trust comes to an end - generally between 5 and 10 years from first investment.

In some circumstances investors can seek to have their investments redeemed by the relevant Fund Manager however the GFC and, more recently Brexit, has highlighted the risks associated with relying on this as the source for liquidity.

Inside little more than a few weeks since Brexit, approximately GBP£18 Billion of property Trusts in the British commercial property market was frozen as investors rushed to redeem their units to get liquidity and even to take money out of Britain.

Some of the biggest British property funds (e.g. Standard Life, Aviva, Aberdeen Fund Managers, Henderson Global Investors, Columbia Threadneedle and Canada Life) have quickly moved to freeze their funds and they expect them to remain closed for months (if not years) leaving thousands of unitholders “out in the cold.

All in all the British market value, pre-Brexit, for property Trusts was made up of commercial real-estate which represents in aggregate BGP£800 Billion (AUD$1.04 Trillion) and residential real-estate of roughly BGP£5 Trillion (AUD$8.563 Trillion) (source: Jefferies Group LLC Report 5 July 2016).

This freezing of British Trusts also is an issue for listed British Trusts e.g. Henderson Group PLC – which is listed in both Britain and Australia – has seen its ASX share price (ASX.HGG) fall 26% from AUD$5.13 to AUD$3.83 in a mere 3 weeks (now market cap AUD$4 Billion).

Mark Carney, Governor of the Bank of England said recently “There is a liquidity mismatch in property funds.”

As context, in Australia:

  • Immediately post the GFC by late 2009:
    • There were more than AUD$15 Billion in frozen mortgage funds and a further AUD$10 Billion split evenly between frozen property funds and frozen cash-enhanced funds, some of which remain frozen even today – some 8 years later.
    • Some 100,000 Australians were caught up with money frozen in mortgage and property funds.
  • Today, it is estimated that unlisted property trusts hold about AUD$25 Billion in assets – through managers such as Cromwell, Charter Hall, BlackWall, Heathley and Sentinel.
  • As an asset class, unlisted property trusts post the GFC have recorded annual returns of >9%.

The perennial problems presented by unlisted Trusts worldwide that never go away are:

  1. They are always illiquid.
  2. When an investor wants to divest they may not always be able get their money out.
  3. The Trust Manager may, in its sole discretion, freeze redemptions from the Trust.
  4. When the Trusts are frozen they can remain so for months and often years.

Additionally, liquidity is a major concern for investors in other financial structures such as mortgage funds, property syndicates and the like.

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