Fitch said it believed there was potential for market reaction to Brexit developments to be more severe than the reaction to the referendum result, particularly if there is a no-deal Brexit.
“Cash levels are marginally better than in mid-2016, when several funds gated due to investor anxiety linked to the UK’s referendum on EU membership,” Fitch said.
“But we do not think liquidity is strong enough to prevent withdrawal restrictions should investors fear a steep market drop due to Brexit developments in the coming weeks.”
It also noted that fund withdrawals jumped in December to a rate close to that after the referendum.
“Rapid changes in sentiment, in relation to political declarations for example, could cause spikes in redemption requests beyond available liquidity, irrespective of the fundamentals of the properties held by the funds,” Fitch added.
In contrast, the agency noted that real estate investment trusts (REITs) have also increased their cash levels, but in this case it was to position themselves to react quickly to investment opportunities that may arise if asset values drop in the event of Brexit-related investor concerns.
Could spark contagion
Fitch said open-ended property funds had a history of imposing such restrictions and that it did not believe they would be able to meet a potential surge in redemptions by selling assets, given the illiquidity of commercial property.
“Initially, funds with weaker liquidity would be more likely to have to implement a gate, but gating of one fund could spark contagion to other funds if it disrupts market confidence,” it continued.
“The UK open-ended property fund segment, although relatively small, could become the marginal seller of risk during the emergence of a Brexit-related stress scenario.
“In such a scenario, gating could cause negative investor sentiment to spread to other segments, which could ultimately affect financial stability,” it added.
