The UK has voted to leave the European Union. The effects of this are largely unknown, but there is the potential for it to negatively impact property prices. A number of property fund managers have therefore made a 'market value adjustment' to the value of their properties. This means investors in affected funds have seen the value of their investment fall around 5%. The largest falls have been seen in the Legal & General UK Property and Kames Property Income funds where both managers have applied an adjustment of 10%.
So far the affected funds include Standard Life Investments UK Real Estate, Henderson UK Property, Aberdeen UK Property, Kames Property, F&C UK Property, M&G Property Portfolio and Legal & General UK Property but there is the potential for other fund managers to take similar action.
Why make a market value adjustment?
Property transactions tend to be infrequent and valuations only take place a few times a year. In the absence of transactional data and up to date valuations, determining a fair price for a property is difficult.
As it is not yet known whether commercial property prices have been negatively affected, investors selling in the aftermath of the announcement could receive an artificially high price, based on the properties last known value. If property prices are subsequently downgraded, remaining investors in the fund would be at a disadvantage. These adjustments have been made to protect existing investors in the funds, and long-term investors should therefore not be concerned.
Once a number of transactions have occurred, the managers will have a better idea of the fair value of their properties and will be able to amend or remove the market value adjustment if appropriate. In preparation for heightened volatility in property prices, Standard Life and Henderson have also moved to more regular independent valuations of their properties.
A market value adjustment is only made to funds investing in physical property, it will not affect those investing only in property company shares. Funds with exposure to both will only apply the adjustment to the proportion of the fund invested in physical property.