Expert Commentary

Locked In! To a Deflation Mindset

The U.K. property market is crumbling.

In the future, when someone is reading a history book about the last few decades in financial markets, they will probably laugh out loud at one aspect of the madness. Investment is, we all at least used to learn, a long-term endeavor. Save and invest frugally and, over time, your nest egg will grow. Property is one asset class where that philosophy would naturally fit. After all, property takes time to build and for sales to be negotiated. You can’t day trade property.

Yet, during this Supercycle top, it became normal for funds that took people’s money and invested it in property to also tell them that they could have their money back whenever they wanted. So-called “daily liquidity” meant that investors could invest in a property fund one day and, if they so desired, take it out the next day. More to the point, people thought that they could access their money whenever they wanted.

In a property bull market, when this was dreamt up, that’s absolutely fine. The architects of these funds thought that there will be more people wanting in than out. After all, property always goes up, right? The problems started when more investors were demanding their money back. The dreamworld that people were living in was shattered on the realization that you can’t divest the underlying property quickly enough to pay people back. Cue funds shutting the gates on angry investors who are locked into a falling market.

This week, U.K. regulator the Financial Conduct Authority, has proposed a notice period of up to six months for investors seeking to withdraw their capital from property funds. According to an article in the Financial Times, one portfolio manager said that the rule changes would “give asset managers greater flexibility to meet redemption requests and should change investors’ perceptions of what to expect.”

We agree, but not with the causality. It is the changes in investors’ perceptions which is driving the rule change proposals. Reality is dawning that the madness of daily liquidity for property funds is a thing of the past and that a slower, more long-term mindset is taking hold. This is wholly consistent with a deflationary era.

 

British Land Company