Savings and investment giant Standard Life froze withdrawals from its £2.9 billion ($3.8 billion) UK real estate fund after a flood of people tried to pull money out in the wake of the Brexit vote.
The Scottish-headquartered company suspended trade of the fund on Monday, blaming "exceptional market circumstances," according to a statement emailed to Business Insider.
Standard Life says: "The decision was taken following an increase in redemption requests as a result of uncertainty for the UK commercial real estate market following the EU referendum result."
Most funds will keep at least some of their holdings in cash so they can repay investors who wish to take their money out at any time. But Standard Life's decision suggests this buffer has been overwhelmed. Property takes a relatively long time to sell so Standard Life is unable to quickly meet demands by simply selling off its investments. If it has to sell off a lot, that also means it could get a bad deal as it is in a hurry to offload.
Standard Life says in its statement:
"Unlike investing in equities, the selling process for real estate can be lengthy as the fund manager needs to offer assets for sale, find prospective buyers, secure the best price and complete the legal transaction. Unless this selling process is controlled, there is a risk that the fund manager will not achieve the best deal for investors in the fund, including those who intend to remain invested over the medium to long term."
Standard Life, which has over 4 million customers worldwide, says the freeze is "to protect the interests of all investors in the fund" and will end "as soon as practicable." The freeze lets it work on getting more money and stops investors panicking as at least they know where they stand.
'2016 is shaping up to be a rerun of 2007'
It is the first time Standard Life or any other UK property fund has stopped investors withdrawing cash from a fund since the 2008 financial crisis and its aftermath, the BBC reports.
Investment bank Jefferies writes in a note to clients on Tuesday that while this year is unlikely to bring a re-run of the 2008 financial crisis for banks, "2016 is shaping up to be a rerun of 2007, with real estate open-ended funds having switched from monthly to weekly valuations and cut pricing by -5% last week given the uncertainty of real estate valuation since the Brexit vote."
Jefferies' Mike Prew and team warn that not only do Standard Life and other funds face a sellers market and a liquidity crunch, people also just don't know how to value property in the uncertain post-Brexit world.
Prew and his team write:
"No one knows how this phony war in real estate markets will end up, but valuers are not inserting an 'uncertainty clause', instead adding a lower level of caveat with an 'advisory note'. Brexit has affected the real estate market but there is no transactional evidence that the UK's valuation methodology can rely on. The likelihood is a one-off Article 50 devaluation when enacted, but it could be delayed until 2017, and the market is left with the high-water valuation mark. Until then, there is no certainty of commercial property valuations."
Put simply, until Britain agrees its new relationship with the EU, people don't know how much an office block in Aldgate should cost.
The UK's commercial property market, which the Standard Life fund is involved in, has been one of the quickest to take a hit from Britain's decision to exit the European Union. The Financial Times reports that London property deals worth £650 million ($856.3 million) have collapsed in the wake of the Brexit vote two weeks ago.
Other commercial property funds have also been writing down the value of their investments in the wake of the Brexit vote - in effect saying the building they own aren't worth as much as they were a few weeks ago now that Britain is on course to leave the European Union.
Aberdeen Property Trust has written off £128 million of value, the Telegraph reports, while Henderson's UK property fund wrote off £160 million of value last week.