Standard Life has been forced to stop retail investors selling out of one of the UK's largest property funds after rapid cash outflows were sparked by fears over falling real estate values in the week after the UK's vote to leave the EU.
The £2.9 billion commercial property fund will need to sell real estate to raise cash before any money can be redeemed. It is the UK's third largest open-ended property fund for retail investors.
The last property crash in the UK, just as the financial crisis started in 2007, was preceded by a wave of similar gatings by funds struggling to meet investor demands for cash. They led to firesales of property that added to the pressure on an already falling market.
Last week, Standard Life marked down the value of the buildings its funds own by 5 per cent in the wake of the Brexit vote. The UK's two largest open-ended property funds, run by Henderson and M&G Investments, did the same.
The move by the insurance giant to bar redemptions is one of the most concrete signs of the Brexit shock filtering from the financial markets into Britian's property sector. The impact could be wide-ranging since property has become one of the most popular choices for retail investors seeking yield in an era of low interest rates.
In another sign of stress in the sector, some closed-ended property trusts are trading at discounts of more than 10 per cent to their net asset value, which reflects fears over the future of commercial property.
"Given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices," said Laith Khalaf, senior analyst at Hargreaves Lansdown. "The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilizes."
Standard Life said the decision was taken to avoid the fund's managers being forced to sell buildings quickly in order to satisfy redemption requests, which have increased "as a result of uncertainty for the UK commercial real estate market following the EU referendum result".
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Investors in the fund will be unable to redeem their holding for at least 28 days. The asset manager said the suspension on the fund's trading will end "as soon as practicable", and will be reviewed every 28 days.
"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," said a Standard Life spokesman.
"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."
Open-ended property funds have been criticized for the mismatch for promising investors daily liquidity despite property being an illiquid asset class.
Adrian Lowcock, head of investing at Axa Wealth, said the suspension of the fund "brings back to focus the issues with investing in open-ended property funds".
"During the financial crisis many investors were stuck in funds which had closed to redemptions as liquidity dried up," he said.
Adrian Benedict, investment director of real estate at Fidelity International, said the ability of open-ended property funds to manage outflows from their vehicles is one of the things being watched by those looking to value property after the referendum result.
Along with transactional evidence from the market, open-ended fund redemptions will "drive capital values over the short term", he said.
However, he added the health of the occupier market will be a better indicator of whether UK commercial property will undergo a longer-term pricing correction.