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The credit crunch a decade ago
A blog by John Forbes, 23rd August 2017
Although some commentators have tried to suggest that the events following the EU referendum were a rerun of the issues faced by property funds during the financial crisis, there are several important differences with the 2008 crisis:
• The post referendum events did not result in anything like the fall in underlying property values. There was a drop of slightly under 5% in the quarter following the referendum, followed by a rapid recovery. This is in major contrast to the global financial crisis that saw a peak to trough fall in UK commercial real estate values of close to 50%. The 2016 events were a short term liquidity crunch in limited group of open-ended funds;
• The open-ended funds that faced serious liquidity challenges after the referendum vote did not have significant borrowings (and are not permitted to) which limited the knock-on effect outside the funds affected.
• Within the open-ended retail funds affected, the liquidity pressures were significantly more concentrated that in the 2008 crisis. A build up of redemption pressure over several weeks in 2008 occurred in a week and a half in 2016.
• Although some commentators at the time suggested that the retail fund suspensions were a repetition of 2008, in fact the suspension of trading in retail funds was highly unusual in 2008. Only one UK authorised fund for retail investors, managed by Newstar, suspended trading in the financial crisis. This fund did not invest in UK property and was subsequently wound up. At the time of the 2008 crisis there were also unauthorised offshore funds that were marketed to UK retail investors, some of which faced significant problems. Regulatory changes mean that such funds can no longer be marketed to UK retail investors.
It is ten years since the start of the financial crisis. When I was at PwC, we regarded the sale of the HSBC Tower for £1.09 billion on 30th April 2007, by some margin the largest single asset deal in the UK at that time, as the high water mark of the UK property market. The market was already weakening by the summer, and from a pooled property fund perspective, the third quarter of 2007 marked a significant change. Following a period of net subscriptions each quarter since the first quarter of 2002, the market moved to net redemptions. The move was relatively small, the first leaks around the edge of the spigot that subsequently popped out of the barrel properly in the final quarter.
My report for the Association of Real Estate Funds (AREF) , "Unlisted funds - lessons from the crisis", was published in 2012. This looked at the events of 2007 and 2008, but also what happened to unlisted funds before and after the crisis. I wrote an extensive blog in January 2016 looking at what had changed since 2012. You can find it here. Since then there have been two further developments that I regard as highly significant:
a) the liquidity challenges faced by open-ended retail funds following the EU referendum vote in June 2016;
b) a flurry of product development activity for long term and permanent capital vehicles. This was predicted in the 2012 report but took a while to materialise.
Both of these are discussed further below.
Fund behaviour after the EU referendum
My report for AREF, "A Review of Real Estate Fund Behaviour following the EU Referendum" was published in April. You can find it here.