PrefBlog

The Great British Property Fund Debacle keeps getting worse:

The uncertainty sweeping across Britain’s commercial property market in the wake of Brexit has affected more funds, including a few owned by Canadian firms.

Bank of Montreal’s Global Asset Management adjusted its U.K. property fund because of an increased number of redemption requests after the June 24 referendum vote in Britain to leave the European Union.

On July 7, BMO’s asset management division announced that its F&C UK Property Fund had cut the price of its units 5 per cent. It said the change was a result of a move to “fair value pricing” that accounted for the uncertainty and downward pressure surrounding commercial real estate property values in Britain.

“The level of redemption requests we have recently received and market conditions suggest that investors may place further redemptions, leading to downward pressure on realizable property values,” the company stated on its website page for the fund, which invests directly in U.K. commercial real estate.

BMO GAM said it has also increased the frequency of valuations for the buildings owned in the fund from a monthly to a weekly basis as a result of the “significant market volatility” following the Brexit vote, requiring closer monitoring as a result.

Last month, BMO GAM’s fact sheet on F&C UK Property said the fund had a value of £305-million ($512.2-million) and a unit price of £110.80. On Thursday, the unit price had fallen to £98.43, a drop of £12.37 or 11.16 per cent.

The unfolding story of British commercial property funds, last discussed July 5, continues to add drama to our hum-drum lives:

Henderson Global Investors and Columbia Threadneedle Investments suspended trading in at least 5.3 billion pounds ($6.9 billion) of property funds, taking the number of U.K. asset managers curbing redemptions to five in the wake of Britain’s shock decision to leave the European Union.
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Henderson said Wednesday it had temporarily suspended its 3.9 billion-pound U.K. Property PAIF fund and feeder funds due to “exceptional liquidity pressures” and the recent suspension of other competitor’s funds. Columbia Threadneedle has also halted its 1.39 billion-pound PAIF and feeder funds, according to a statement.

M&G Investments, Aviva Investors and Standard Life Investments have also halted withdrawals in their real estate funds. About 24.5 billion pounds is allocated to U.K. real estate funds, according to the Investment Association.

and:

Canada Life Limited said on Wednesday it was suspending its property funds, becoming the sixth firm this week to do so.

Canada Life said in a notice to investors seen by Reuters that it was suspending its Canlife Property and Canlife UK Property life and pensions funds with effect from 1400 GMT July 5.

The firm said it made the decision due to “ongoing uncertainty around the pricing of commercial property assets, following the vote to leave the EU, and the recent rise in requests to withdraw…from the property funds.”

This is a good reminder for holders of junk funds:

Only about 7 percent of the total commercial real estate market is held in daily-dealing funds, according to the Bank of England. Meanwhile more than 90 percent of all European corporate debt funds, including high-yield bonds, offer daily redemptions, according to Fitch Ratings.

The credit markets had a recent taste for how a liquidity mismatch might play out when in December Third Avenue Management froze withdrawals from a $788 million credit mutual fund, saying it couldn’t meet redemptions without resorting to fire sales. The move triggered a selloff in high-yield bonds and stock markets and prompted other funds to close.

The ECB recently published an ‘Occasional Paper’ titled Shadow banking in the euro area: risks and vulnerabilities in the investment fund sector that discussed the issue:

Investment funds are said to perform liquidity transformation whenever it takes more time to liquidate invested assets than to exchange fund shares for cash. Such liquidity transformation should in general deliver a positive return: investors are able to gain exposure to less liquid, possibly higher yielding assets, while at the same time maintaining access to their funds at short notice.

However, liquidity transformation also carries a financial stability risk similar to the run-risk in deposit-taking institutions. The social cost of liquidity transformation may not be evident until many investors wish to redeem their shares at the same time. Such costs include rising yield spreads in the underlying securities, rising asset liquidation costs, or the inability to sell fund shares if redemptions are suspended. Investors may be able to minimise their individual cost by exiting a fund early rather than late, i.e. before other investors do. Such first-mover advantages can create strategic interactions among investors, including the risk of bank-like runs,30 resulting in higher costs for the system as a whole (see Box 3).

By offering daily callable claims for investing in less liquid instruments, open-end funds may further add to the illusion of liquidity if investors do not properly discount for the liquidity transformation risk.

All this excitement is having an effect on my favourite metric:

Japan and France are leading the way as demand for the safest assets boosts the amount of global bonds with negative yields to $9.8 trillion, according to Bloomberg World Sovereign Bond Indexes. That’s up from $8.35 trillion before Britain voted to leave the European Union last month. The latest new entrants include Japan’s 20-year bonds, and French nine-year securities, which both saw yields drop below zero for the first time in the past 24 hours.

I’m very disappointed with recent developments in US college tuition proposals:

Hillary Clinton is changing her college-affordability plan in an effort to reach Bernie Sanders supporters, proposing the elimination of public in-state tuition for students whose families make less than $125,000.
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Throughout the Democratic primary campaign, Sanders advocated eliminating tuition at public colleges and universities, something he said could be done at a cost of $75 billion annually, funded by a new Wall Street speculation tax.

Clinton said the plan was unworkable and that it didn’t make sense for tax dollars to go toward the tuition of students who can afford to pay, often citing Trump’s children and grandchildren as examples.
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Her compromise with Sanders, billed by her campaign as incorporating “a key principle” from Sanders’ plan, would eliminate in-state tuition for students for whose families earn less than $125,000. It would be phased in over the course of four years, starting with families that earn up to $85,000 and raising the income threshold by $10,000 a year until 2021.

The first problem is that it’s free. Free stuff gets wasted. I don’t want kids to graduate with crippling debt that destroys their ability to take a few risks with employment; but I don’t want them to spend two years partying because it doesn’t cost anything, either. There should be a direct cost; not enough to cover the whole price, but significant enough that one will be sad if it’s thrown away.

The second problem is that it’s not universal. This bloody means-testing, it’s one of the biggest impediments to self-improvement going. First, say you have family income of $105,000. Well, guess what Junior! You’re not going to college for two years, because then it will be free, compared to $25,000 p.a. now. So that’s a problem with the phase-in. And the problem with means testing is, as always, obvious to anybody with the brains he was born with: if a family makes $120,000 and has a kid at university, then improving their situation to $130,000 will actually cost them money.

Remember the very public Wal-Mart / Visa battle?:

The clock is ticking on Walmart’s pledge to stop accepting Visa cards at its Canadian stores. The retail giant confirmed that starting on July 18, customers will no longer be able to use the credit card at its three locations in Thunder Bay, Ont.

But the Visa ban may never come to your neighbourhood Walmart, a business and economics expert tells CBC News.

Carleton University professor Ian Lee believes the retailer is conducting a slow, strategic rollout because it expects to reach a compromise with Visa — long before Walmart has to drop the credit card from all its Canadian stores.

“It’s very deliberate, it’s very calculated,” says Lee. “They’re playing a high-stakes game of chicken.”

Well, here’s a bit of news some might consider related:

Wal-Mart will now let you pay with its phone app at all 4,600 stores nationwide.

The effort is part of Wal-Mart’s strategy to make shopping easier and faster, while learning more about consumer behaviour.

With Wal-Mart Pay, the cashier scans a QR code on the phone screen to charge a credit, debit or Wal-Mart gift card linked with the account. It differs from Apple, Samsung and Android Pay, which involves tapping your phone next to a payment machine with a wireless technology called NFC.

In December, Wal-Mart said it would develop its own digital wallet rather than honour existing systems from Apple and others, though Wal-Mart said it isn’t ruling out third-party wallets in the future.

Retailers have been pushing their own systems in part because they retain control. Daniel Eckert, senior vice-president of services at Wal-Mart U.S., says data from the app will be used to improve the shopping experience. One way, he said, would be to use past shopping behaviour to build a personalized shopping list. The customer could then delete or add items. He said such features would be done only with a customer’s permission.

PerpetualDiscounts now yield 5.35%, equivalent to 6.96% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.65% (!) so the pre-tax interest-equivalent spread is now about 330bp, a significant widening from the 310bp reported June 22.

Yesterday I mentioned redemptions in property funds in the UK and the suspension of redemptions in the Standard Life fund. Standard Life has company!

Three of the U.K.’s largest real estate funds have frozen almost 9.1 billion pounds ($12 billion) of assets after Britain’s shock vote to leave the European Union sparked a flurry of redemptions.

M&G Investments, Aviva Investors and Standard Life Investments halted withdrawals because they don’t have enough cash to immediately repay investors. About 24.5 billion pounds is allocated to U.K. real estate funds, according to the Investment Association.
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The rush by private investors to withdraw money prompted M&G, which held 7.7 percent in cash before the vote, to suspend its 4.4 billion-pound Property Portfolio fund and Aviva Investors to freeze its 1.8 billion-pound Property Trust on Tuesday. Standard Life halted trading on its 2.9 billion-pound U.K. real estate fund on Monday. The cash position for Aviva and Standard Life’s funds at the end of May was 9.3 percent and 13.1 percent respectively, documents showed.

There has been concern for a long time about the effects of having a very liquid layer of ETFs representing investments in highly illiquid assets, so it will be interesting to see how this plays out. Have investors been over-paying for liquidity? Will the regulators develop so many liquidity rules that the sector cannot function?

The federal Bombardier bail-out is on hold:

Canadian Prime Minister Justin Trudeau’s government doesn’t expect to reach an aid deal with aircraft manufacturer Bombardier Inc. before the fall, according to officials familiar with the talks.
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Innovation Minister Navdeep Bains, the government’s point-person in negotiations, is due to meet with Bombardier executives next week at the Farnborough International Airshow. Negotiations, however, remain stalled and Trudeau’s team expects no developments this summer, believing Bombardier has a year or more before it faces a serious cash crunch, the officials said, speaking on condition of anonymity as the talks are private.

Some analysts are attempting to come to grips with the effect of self-driving cars:

But what if by 2030 more people are willing to embrace self-driving cars? All the legal and regulatory issues have been ironed out and people have grown comfortable with the idea of riding rather than driving. Under this scenario, 30 percent of cars belong to shared autonomous fleets. Another 23 percent of privately owned cars are fully autonomous. Only 47 percent of the cars are private conventional vehicles.

This shift to higher-occupancy, longer-lasting vehicles would result in an 8.6 percent decline in vehicle sales (compared to the baseline 16.5 million units that would be needed to meet organic demand in 2030 if nothing changed.)

In the most extreme scenario, the number of cars on the road would fall by half because more people would rely on shared, autonomous vehicles rather than privately owned vehicles. (Call Uber for a ride, and a robot car would pick you up, or take a train to the city, and hop in a driverless cab for the last mile. Even families could share one autonomous car.)

Those shared vehicles would rack up miles faster, however, so they would need to be replaced sooner. The net result for automakers: a 26 percent drop in vehicle demand.

The world’s biggest pension fund is being criticized for high risk:

Japan’s Government Pension Investment Fund will probably post a 4.4 trillion yen ($43 billion) loss in the April-June quarter, according to calculations by Yohei Iwao, executive director of the institutional equities division at Morgan Stanley MUFG Securities Co. That follows what he estimates was a 5 trillion yen decline in the fiscal year ended March 31, which would amount to the worst performance since fiscal 2009 when the fund lost 9.7 trillion yen.

The calculations come amid criticism the government has put the public’s pension money at risk after the fund known as the whale for the size of its assets increased its equity allocations in 2014. That’s prompted the main opposition party to pledge GPIF will move investments back into safer ones in its manifesto ahead of elections this month.
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GPIF likely held about 43 percent of its portfolio in domestic bonds at the end of June, higher than its target of 35 percent for the asset, he said. Japanese stocks probably accounted for 22 percent, while international equities made up 22 percent, Iwao said. He estimates foreign debt stood at 14 percent. GPIF’s target for equities is 25 percent each, and 15 percent for international bonds.

It is interesting that the fund has a much more conservative asset mix than the Canada Pension Plan!

Brexit’s implications are far-reaching:

Realtors in Toronto and Vancouver are pitching Canadian cities as relatively safe property havens now that London, for years one of the world’s leading targets of foreign capital, suddenly looks a lot riskier. Blame it on Brexit.

“Brexit’s good for us, not for them,” said Anita Springate-Renaud, owner of Engel & Völkers’ brokerage in Toronto, who expects to field calls from clients seeking to redirect their investments. “We are a safe bet.”

If Springate-Renaud is right, there may be heightened demand from moneyed clients for homes and condos as well as office towers in two of Canada’s hottest real estate markets, which already have seen prices soar from an influx of foreign money.
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Royal LePage is advising clients that Brexit is likely to cause the Bank of Canada to hold interest rates lower for longer, which will stoke demand in the residential market, said Adil Dinani, a Vancouver agent for the unit of Brookfield Real Estate Services Inc.

Any additional trickle of demand into Vancouver and Toronto could prove a headache for Canadian policy makers seeking to damp record high home prices. In recent weeks, the International Monetary Fund, Organization of Economic Cooperation and Development, and Bank of Canada have all flagged the increasing risk of a potential correction.

“It’s something we’re going to have to talk about because there are concerns about overheating,” said Royal LePage’s Dinani. “We’ll likely see more capital inflows into these cities, so what is that going to look like? Are there going to be policy tools put in place to protect the market from further increases?”

And there may be some money on the way!

Standard Life Investments suspended trading in its 2.9 billion-pound ($3.9 billion) U.K. Real Estate fund on Monday after Britain’s vote to leave the European Union triggered a surge in redemptions.

The fund, which invests in a mix of prime commercial real estate assets, was halted at midday and the decision will be reviewed every 28 days, the Edinburgh, Scotland-based fund manager said in a statement. Standard Life adjusted the value of the underlying assets by 5 percent last week.
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Investors are pulling money as industry commentators warn that London office values could fall by as much as 20 percent within three years of the country leaving the European Union. [Hargreaves Lansdown analyst Laith] Khalaf estimated that about 25 billion pounds is invested in property sector funds by U.K. investors, including those that invest in stocks.