AVVIY Aviva PLC (PK)

Pair of large asset managers won't let investors withdraw as the pound sinks

By Darren Lazarus, Jason Douglas and Jenny Strasburg 

LONDON -- Two big British asset managers blocked worried investors from pulling money out of real-estate funds, and the pound sank to a new 31-year low Tuesday, twin signs that the U.K.'s vote to leave the EU was injecting new turbulence into financial markets after days of relative calm.

At the same time, the Bank of England eased regulatory restraints on British banks, a bid to allow them to lend more and keep the economy flush with credit.

Britain is laboring through the second week after its Brexit vote with little clear direction. David Cameron has announced his resignation as prime minister, his Conservative Party is picking a successor in a sharply contested ballot and the opposition Labour Party is in disarray.

Much of the postvote economic response has been left to the central bank and its governor, Mark Carney. A news conference Tuesday was Mr. Carney's third public appearance in the 12 days since the vote.

The fund freeze is among the most tangible economic consequence to sprout up. Investors, concerned that Britain's huge and frothy real-estate market might come undone, scrambled to dump their holdings. Fund managers, unable or unwilling to sell the shopping malls and office buildings in their portfolios, closed the door.

M&G Investments and Aviva Investors both said Tuesday they had barred investors from pulling out of property funds, following a similar announcement by Standard Life on Monday afternoon.

The real-estate fears and the pound's decline are intertwined: Foreign investors have been huge buyers of U.K. property, and they have started to cash out. The Bank of England said Tuesday in its financial-stability report that foreign flows into U.K. commercial real-estate sank nearly 50% in the first quarter. Late Tuesday in London, the pound traded near $1.30, down 2%.

The central bank also pointed to signs in the stock market -- the midcap FTSE 250 index fell 2.4% Tuesday -- that foreign investors were pulling out of the U.K. The economy faces a "material slowing" in growth in the months ahead, officials warned in the report.

Stocks fell broadly in Europe Tuesday. The only index that ended the day in positive territory was Britain's FTSE 100, which is packed with companies with foreign earnings and is boosted by the weak pound.

Investors fled to government bonds: Yields on the 10-year U.S. Treasury bond and the 10-year U.K. gilt touched record lows. Yields fall as prices rise.

Souring views on the global economy, and views that low inflation will persist, have helped pull down long-term bond yields across the developed world. Short-term bond yields have also declined, reflecting a belief that central banks will keep rates at ultralow levels, or possibly even cut them further. But the slump in long-term yields is especially dramatic. In the U.K., the 10-year bond now yields around two-thirds of a percentage point more than the two-year bond, roughly half the spread that existed at the beginning of the year.

The BOE's move Tuesday to reduce the so-called countercyclical capital buffer from 0.5% to zero is one of the first instances of a major central bank relaxing bank-capital requirements to mitigate a gathering economic slowdown.

The change means banks don't need to hold as much capital against their assets. The BOE said they aren't supposed to use the breathing room to increase dividends or other payouts.

It is an especially important test case because traditional central-bank tools are stretched. The BOE's benchmark interest rate is 0.5%, meaning Mr. Carney doesn't have much room to cut rates further. The bank may be led to cut nonetheless and to revive its bond-buying program.

Real estate is an especially vulnerable asset to mass flight because it is difficult to sell quickly, while "open-ended" funds typically allow their investors to cash out any day they like.

"Systemic risk would arise from the funds needing to sell illiquid assets in a hurry," said Michael Snapes, a financial-services risk and regulation director with PricewaterhouseCoopers in London. That would depress prices further, spurring more redemption requests and a downward spiral.

M&G said it put up the gate on a GBP4.4 billion U.K. property fund -- the biggest of its kind -- after redemption requests rose on the back of "high levels of uncertainty."

Aviva said in a note to investors that dealing in the GBP1.8 billion Aviva Investors Property Trust was "temporarily suspended" at midday on July 4 because of "higher than usual volumes of requests to sell units." Standard Life locked investors into its GBP2.9 billion UK Real Estate Fund.

"It would not surprise me if similar firms take similar actions in the coming weeks," said Laith Khalaf, senior analyst at Hargreaves Lansdown.

The U.K. commercial real-estate market holds in aggregate about GBP800 billion worth of assets, according to Mike Prew, an analyst at Jefferies Group LLC. Residential real-estate assets amount to a total of GBP5 trillion.

Memories of the global financial crisis of 2008, when problems in the housing sector quickly spread to banks, loom large for investors.

Analysts said the U.K. banking system is now more insulated against a commercial-property crash than it was then. Regulators forced banks to raise capital and go through a series of stress tests to check whether they can weather a severe downturn.

British banks have since cut their stock of commercial real-estate lending in half, according to the Bank of England. Much of that slack was taken up by the nonbanking sector: Pension funds and insurers, looking for steady returns in a low-interest-rate environment, piled in.

But while major banks like Lloyds Banking Group PLC and Royal Bank of Scotland Group PLC cut their lending, smaller British banks have jumped in. These newer lenders have taken on proportionately more high-risk loans in the commercial sector.

Investors are already taking flight from smaller banks that have been gaining share in the buy-to-let market, in which banks lend to landlords. Some analysts expect rental-property lending to be stung by Brexit if house prices fall, especially in London.

For instance, Aldermore Group PLC, a small lender which focuses on small businesses, saw its share price drop 9% on Tuesday. It is down 64% over the past 12 months.

A relatively small increase in write-offs of U.K. real-estate exposures would be painful for Aldermore and a handful of other small lenders with more-concentrated investment in the sector, Deutsche Bank U.K. banking analyst David Lock wrote in a research note last week.

Meanwhile, shares of Virgin Money Holdings PLC, another rapidly growing bank, tanked 11% on Tuesday's news. In the first three months of the year Virgin Money increased buy-to-let lending by 17% compared with the year before.

--Max Colchester, Elizabeth Pfeuti, Andy Pearce and Mike Bird contributed to this article.

Write to Jason Douglas at jason.douglas@wsj.com and Jenny Strasburg at jenny.strasburg@wsj.com

(END) Dow Jones Newswires

July 06, 2016 02:48 ET (06:48 GMT)

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