AFTER the initial post-Brexit sell-off in sterling and equities, financial markets had quietened down in the wake of the shock referendum result. The FTSE 100 even moved ahead of its pre-Brexit level.

But investor concerns have shown up in another market - property, Today Standard Life, the Scottish insurer, suspended redemptions in its UK Retail property fund, with £2.9 billion of assets under management. Here is the press release.
Due to exceptional market circumstances, Standard Life Investments has taken the decision to suspend all trading in the Standard Life Investments UK Real Estate Fund (and its associated Feeder Funds) from 12:00 noon on 4 July 2016.  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. The suspension was requested to protect the interests of all investors in the fund and to avoid compromising investment returns from the range, mix and quality of assets within the portfolio.  “The Standard Life Investments UK Real Estate Fund invests in a diverse mix of prime commercial real estate assets from across the office, retail, industrial and other sectors. Its lower risk positioning should be beneficial for performance in times of market stress and uncertainty. The fund continues to offer a stable and secure income return with a distribution yield of c3.86% (SLI UK Real Estate Fund, Institutional Income Share - class on 15 June 2016). However, 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. Approval for the suspension was received from Citibank Europe plc, in its capacity as Depositary for the fund. The suspension will end as soon as practicable, and will be formally reviewed at least every 28 days.

Commercial property values have come under pressure since the referendum result because of doubts about London's attractiveness as an investment destination outside the EU. Given the uncertainties, Henderson, Aberdeen, Legal & General, M&G and Standard Life had all applied "fair value adjustments" to fund values of 4-5%. There have been bigger falls in the value of quoted property funds or real estate investment trusts (REITs) with some dropping by 20%; funds based in central London have taken the biggest hit. Earlier today, there was a big fall in the purchasing managers' index of the construction sector, taking it to its lowest level since 2009.

The Financial Times reported on Friday that deals worth £650m had been pulled since the result, including the purchase of a Cannon Street development, in the heart of the City, by Germany's Union Investment. Russell Chaplin, chief investment officer of the property division of Aberdeen, says many deals had a "Brexit clause" allowing purchasers to walk away if Britain voted to leave. This has happened to Aberdeen in two cases; one buyer abandoned the purchase altogether while the other asked for a price discount, which has not been accepted. Of course, Aberdeen is a buyer as well as a seller and can negotiate its own discounts. 

The big question is how this news will affect retail investors elsewhere. The risk is of a run; if buyers fear they will lose access to their money, they will rush to withdraw their savings, triggering the event they dread. Property mutual funds have a liquidity mismatch; savers can withdraw their money every day but property takes months to sell. Funds tend to run with high levels of cash in order to meet this eventuality; Aberdeen says its fund has a cash level of 18% of assets. Standard Life's last factsheet showed the fund had "liquidity" of 13% of assets but it clearly felt it had to take action. The fund had around 62% of its assets in London and the south east; its biggest investments included shopping centres in Leamington Spa, Newcastle and Slough.

Regulators worried last year about the possibility of systemic risk in the mutual fund sector, although then their concern was about corporate bonds, rather than property. The good news is that this is not like the money market fund crisis of 2008; few people will be keeping their spare cash in a property fund and most will realise that they can lose, as well as make, money. Nevertheless, this is the first real sign of post-Brexit financial stress.