Freeze in UK property fund trade may trigger next financial crisis

Seven investment firms suspended trading in their property funds this week, freezing £15 billion ($19.4 billion) of assets since Monday, out of a total of £24 billion sunk into UK open-end real estate funds. The freeze on redemptions occurred as investors got frightened after the Brexit vote, and what it could do to the UK’s property market, and rushed to pull out their money from funds.

The fact that fund managers could not liquidate, or sell-off their underlying property assets fast enough to meet the demand for cash from fleeing investors is a sign that Britain might be close to another financial crisis as investor confidence nears rock-bottom.

Property funds can provide an early litmus test of how terrible investors are feeling. The credit crisis of 2007 began with the freezing of two property funds at Bear Stearns. A lot of finance depends on confidence: Confidence that a borrower will pay back a loan with interest. The confidence that someone will buy an asset for more than you paid. Confidence that you can pull your money from a fund at a moment’s notice if you need the cash.