U.S. open-ended mutual funds have significant exposure to U.K. real estate investment trusts, or REITs, adding another area of concern for those evaluating the impact on U.S. savers and retirees of the U.K. vote to leave the European Union, or Brexit.
Shares of London-listed real estate investment trusts and asset managers fell sharply earlier this week after a spike in redemption requests led to several firms suspending withdrawals in unlisted UK direct investment property funds. Those prices had begun recovering by Thursday morning. According to a Morningstar spokeswoman, none of the U.K. funds that suspended withdrawals are offered to U.S. investors.
Since the U.K. referendum on leaving the E.U., worries have increased over falling U.K. commercial property prices. U.K. commercial property funds halted redemptions due to concerns about sufficient liquidity to meet investor demands for withdrawals. These funds provided a vehicle for investing in illiquid private real estate. Since investor redemptions must be funded directly from the fund’s assets they came under pressure to sell those assets to meet higher demand for withdrawals.
REITs are companies or groups of companies that manage a portfolio of real estate to earn a return for shareholders. The U.K REITs held by the U.S. open-ended funds are listed in London and there have been no reports of any of them suspending trading due to share price pressures on the fund.
According to data provided by Morningstar, Inc., the mutual fund research firm, 280 U.S. open-ended mutual funds hold investments in U.K. REITs, and nine of those funds hold more than 10% of their portfolio market value in U.K. REITs.
|Fund name||Ticker||% of Portfolio Market Value||1 Month Return % (Ending 6/30)||YTD Return %|
|Virtus Intl Real Estate Securities A||
|DFA International Real Estate Sec I||
|Morgan Stanley Inst Intl Rl Est A||
|AR Capital Global Real Estate Income A||
|Prudential International Real Estate A*||
|NWS International Property Institutional||
|Salient International Real Estate A||
|Cohen & Steers International Realty A||
|Voya International Real Estate A||
Source: Morningstar, Inc.
*In preparation for the liquidation of the Prudential International Real Estate Fund on or about August 22, 2016, the fund has been closed to most purchases and exchanges.
A spokesman for Virtus Investment Partners told MarketWatch that the fund had already reduced its exposure to the U.K. real estate market before the Brexit vote, but after March 30, when this snapshot was taken. “Any exposure that remains is focused on rental properties versus homebuilders. That will be apparent when the June 30 reports come out,” he said.
Spokespersons from Salient Partners, Voya Investment Managment LLC, JP Morgan
and Morgan Stanley
declined comment. Spokesmen from Wells Fargo
, AR Capital, and Northwood Securities LLC did not respond immediately to a request for comment.
Rogier Quirijns, senior vice president and portfolio manage for European real estate for Cohen and Steers told clients in a recent letter, “In the long run, we believe listed REITs stand to benefit from the turmoil. Certain REITs have well-capitalized balance sheets and could be in a position to take advantage of attractive buying opportunities presented by open-end funds. As securities markets eventually calm down, some REITs may be able to tap the capital market to buy even more assets to grow their portfolio and earnings.”
Some fund families are represented on Morningstar’s list of U.K. REIT investment more than once. Virtus Investment Partners runs two funds in the top 35 including Virtus Intl Real Estate Securities A fund which takes the top spot. That fund has 16.87% of its total investment portfolio as of March 31, 2016 represented by eight U.K. REIT investments. Dimensional Financial Advisors International Real Estate Sec I
fund holds interests in eighteen U.K. REITs, representing 14.86% of its portfolio as of May 31, 2016.
A spokesman for Dimensional Fund Advisors, which sponsors the fund with the second largest overall exposure, provided this statement to MarketWatch: “The DFA International Real Estate Securities Portfolio has maintained this relative level of exposure since its inception, allowing investors to achieve a predictable level of exposure to international real estate and rental income in making asset allocation decisions.”
U.S. open-ended funds hold approximately $2.3 billion, by market value, in the most widely held U.K. REIT names: Land Securities PLC
, Britain Land PLC
, and Hammerson PLC
. Morgan Stanley has five funds on the Morningstar list, including the one with the third-largest exposure to UK REITS, its Morgan Stanley Institutional Fund, Inc. International Real Estate Portfolio
. That fund alone holds ten U.K. REIT investments which account for 13.63% of its portfolio. Twelve different Wells Fargo funds hold eight different U.K. REITs and six different JP Morgan funds hold four different ones, including the three most widely-held.
A Bank of England’s Financial Policy Committee report released Tuesday noted that the U.K. commercial real-estate sector had seen heavy foreign inflows since 2009—accounting for roughly 45% of the value of total transactions. The report did not say which non-UK investors made up that 45%.
The amount of exposure that U.S. pension funds have to the stress on U.K. real estate investments is not yet known.
MarketWatch asked a spokesman for the New York State Comptroller, which manages the New York State Common Retirement Fund, the third largest pension fund in the U.S., if the U.K real estate stress would affect retirees. A spokesman for the New York State Common Retirement Fund, told MarketWatch, “[The Fund] is a long-term investor and is in the midst of evaluating Brexit’s impact. It would be premature to comment.”