Add the property market to Ritchie’s spheres of excellence

Brexit contagion is spreading. Yes I know the FTSE 100 has more than recovered its losses. But the FTSE 250, which reflects British economic activity much more accurately than the 100, has not and is heading down again right now.

The pound remains seriously devalued.

And this afternoon all the signs of a property crash are developing as insurance companies have had to close withdrawals from their property funds.

This is about the commercial property market. Not the residential.

Further, why have these funds stopped withdrawals? Because they are illiquid.

As I mentioned this morning Standard Life has had to suspend withdrawals from one of its property funds in the wake of the Brexit vote. We’re now seeing the same problem afflict another such fund, this one run by Aviva Investors. The problem here is akin to that problem that fractional reserve banking can fall foul of, liquidity problems rather than solvency ones. Investors can withdraw their money on demand – but the property which the money is invested in is very much more illiquid than that investor demand for cash at times. Thus it is possible that any cash margin gets wiped out, that the fund simply cannot sell properties fast enough to redeem investments.

It’s not even that prices have declined. It’s that investors think they might therefore they are asking for their money back faster than property can be sold.

This entire sector is worth some £30 billion. This is about a liquidity mismatch, not a plunging property market.

10 thoughts on “Add the property market to Ritchie’s spheres of excellence”

  1. Must admit, never really understood why fund management firms (and the two that have announced redemption suspensions are insurance companies) thought an open ended structure was a good idea given the portfolio liquidity.

  2. Shame. I want a property market crash.

    Richie doesn’t as he has recently purchased a house, so might be concerned he bought at the top of the market.

  3. You’d have to be an utter mug to invest in property through what we used to call a Unit Trust. REITs, for example, make more sense. Except that they are pronounced “reets” which would put off any person of good taste.

  4. Somebody on Money Box made an appropriate comment: you ignore 30-day fluctuations when making a 30-year purchase decision.

  5. er, are you sure this isn’t about a plunging property market? I know it’s commericial property but I suspect funds having to suspend trading to avoid a property firesale to fund withdrawals is an indicator that the residential market might be heading down too. OK, in expectation rather than in fact thus far, but aren’t markets-are-good types inclined to take the expectations of investors with skin in the game seriously?

  6. Luis Enrique has a valid point. Murphy as always doesn’t. Besides which, given he is on the record in approximately one thousand blog posts describing the stock exchanges as ‘feral finance’ and ‘casino capitalism’ why does he care what happens in the FTSE 100 or FTSE 250? If anything I thought he would welcome the developments as one of the key planks of his economic policy programme is the complete nationalisation of all economic activity within the UK – this will make that cheaper and easier to achieve.

  7. @ Luis Enrique
    Commercial and Residential propertyy markets are vaguely linked in that if the valuations on one of them gett too high/low relative to the other then someone will buy commercial/residential property to convert it into residential/commercial – but that only cuts in when the differential is big enough to cover the cost of conversion and the interest costs/loss of rent for the time the properyy was unoccupied during the conversion.
    Residential property prices should fall after Brexit (ONS says there are 6.5m immigrant workers and over 3m unemployed British nationals in the UK suggesting that freedom of movement has worsened the housing shortage pushing up prices) but the freezing-up of deals in the commercial propertyy market is more due to uncertainty than to any actual price fall and the impact on the residential property market will not be felt before the funds reopen for dealing.

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