UK property investors are pulling money out of real estate funds even faster than in the aftermath of the 2016 Brexit referendum, according to Calastone, the global funds transaction network.

Calastone’s latest Fund Flow Index (FFI) shows the net outflow of capital from property funds is now equal to that in 2016-2017, when acute liquidity shortages meant many funds suspended redemptions (i.e. selling by investors) altogether for a time. Yet, the outflow is now taking place much more quickly than then. February 2019 saw the fifth consecutive month of net selling, as £155.7m left the sector. £1.1bn has now been withdrawn from real estate funds since October. By contrast, in 2016-2017, it took almost a year for investors to redeem a similar value.

The real estate sector is not only seeing dramatic outflows, but it also stands out for having the lowest two-way trade of any asset class. This means that a very large proportion of the trading activity is simply selling, rather than the outflow being the difference between a large amount of selling and a slightly smaller amount of buying. For example, equity funds have seen a modest £1.1bn of inflows on a total value traded of £64.6bn since October, meaning that buys almost equalled sells as many investors were adding to their holdings while many others were reducing them. By contrast, selling in real estate funds was twice as large as buying activity. As a result, the Calastone FFI: Real Estate has averaged 34.5 since October, easily the weakest reading of any asset class in the Calastone Fund Flow Index (any reading below 50 indicates outflows). When selling is such a huge proportion of all trading activity, it signifies exceptional pessimism on behalf of investors.

The situation is serious enough to have drawn the attention of regulators. In late January, the FCA mandated daily monitoring of real estate fund liquidity in response to the unprecedented outflows. Calastone’s daily fund transaction data shows that investors have pulled money out of property funds on every day except five the last three months. Moreover, on the handful of days that saw inflows, the amounts subscribed were very small. On every other day, money flowed out of the sector, often tens of millions of pounds at a time. In February, since the FCA announcement, net outflows took place on nine out of ten days.

” It’s clear investors are very pessimistic about the impact of Brexit on the real estate sector’s prospects ”

Edward Glyn, Calastone’s Head of Global Markets, comments: “Property funds have been hit far harder than any other asset class as the UK gears up to leave the EU. It’s clear investors are very pessimistic about the impact of Brexit on the sector’s prospects. Indeed, the latest PMI data from the construction industry shows significant weakness for commercial and engineering construction. But investors may also have been mindful in the last few months of the difficulty they faced getting their money out of real estate funds in the aftermath of the 2016 referendum. To avoid getting trapped again after the end of March, prudence may have dictated that they act well ahead of time. But there’s more going on than just Brexit. Real estate markets have been softening around the world as interest rates have moved higher, thereby reducing the attractiveness of the yield on property. The current slowdown in the global economy also means weaker demand for commercial property. Central banks have started to react, however, indicating that further rate rises may be off the cards. That could move the dial more positively for real estate funds in the months ahead. If the UK can navigate Brexit with minimal disruption, we are likely to see capital return to the sector again.”

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