By David Malone and cross-posted from Golem XIV
Update: Aberdeen suspends trading on £580m UK Property fund and cuts price by 17%
So begins an article in Investment Week.
Aberdeen Asset Management has temporarily suspended trading in its £580m UK Property fund as well as reducing the price of the fund by 17%, joining a number of other groups in making property fund adjustments amid a post-Brexit rush to exit the asset class.
In fact Aberdeen are the 7th major fund in just a few weeks to either lock in their investors, not allowing them to get their money out, or to allow it but at a heavy discount. Before Aberdeen we have already had:
Standard Life – Aviva – M & G – Henderson – Columbia Threadneedle and Canada Life
All have suspended trading in a large property fund. Standard Life also cut the valuation of the fund by 15%. And that sudden re-valuation, a mark to market is the headline.
When one fund says its property assets are actually worth 17% less today than yesterday, that means every single investor in every single fund now faces that same loss. Every one of those assets that is being used as collateral for a loan or for margin trading is now worth 17% less. Trading on margin simply means that instead of using your own money to trade, you borrow money and pledging or ‘post’ collateral to underpin it with your lender. But when your collateral is considered to have fallen in value your lender makes a ‘margin call’ which means they require you to pledge more collateral to make up the shortfall. In this case an additional 17%.
Where do you get that money from? Well some will have to sell assets to make up the difference. But those assets, if they are property, might well also be suddenly worth 17% less. And if lots of people try to sell, to meet margin calls, the price might go down further.
So Funds like Aberdeen are warning their investors not to trip this booby trap.
If they insist on getting out anyway, you have a run.
Which would spread because its not just funds that hold lots of property assets or loans underpinned by them. This from a Soc Gen study via Zerohedge (CRE is Commercial Real Estate)
RBS exposure to CRE is GBP 26b, equivalent to 63% of tangible equity
Lloyds 2nd most exposed at 46% of tangible equity, Santander 3rd at 24%, Barclays4th at 23% and HSBC 5th at 17%
These are all big numbers. For RBS a 17% mark down on 26B is 4.42B
Now we have a clue what RBS share price has been falling relentlessly and is headed right back to where it was trading at the bottom of the crisis in 2009.
Now if you listen to the press this is all the fault of Brexit. Which strikes me as misdirection. It’s trying to suggest this is a political problem created by the great unwashed and nothing to to do with greedy investors speculating and lenders lending into a bubble market…