Are builders, banks and property firms now toxic?

As investors clamour for their money back, more than half the £25bn lodged in Britain’s property funds is locked-in by frozen assets and suspended redemptions.

Big names involved in putting the brakes on include M&G Investments, Standard Life and Threadneedle. Others such as Aberdeen, Legal & General, and F&C Investments imposed a cut to their funds’ asset values for anyone wanting to take out money, forcing investors withdrawing their cash to accept a lower sum than would have been available the last time the fund was valued.

Imminent collapse?

Some investors seem to be speculating that the Brexit process could end up making Britain’s commercial property less attractive, thus putting pressure on prices. They argue that if property prices weaken the outlook for the broader financial system could also be in jeopardy, particularly banks, other lenders, and those firms involved in the property market such as the housebuilders.

I’m not so pessimistic. Despite the potential for panicky investors to create a self-fulfilling outcome, several frictions will likely stop an out-and-out collapse of these sectors. On top of that, I think one other compelling reason makes it unlikely that builders, banks and property firms are as toxic as feared.

More than half the property fund sector is on ice and it will take property sales to raise the cash needed to meet demand for redemptions. Selling property isn’t a fast process, and it becomes even tougher if property values start to fall. That means property funds look set to be locked down for weeks and months rather than just for days. I reckon the measures funds are taking now to discourage a stampede for the exits will act as friction against a property crash. With luck, fund managers will drag their heels over selling property, which should prevent a knee-jerk fire sale mentality that could otherwise sink prices.

Banks in good shape

Maybe property prices had run up too far and a modest correction in values is probably a good thing for stabilising the market. There’s unlikely to be a domino effect with falling property prices taking down other sectors, I’d argue. After years of balance sheet rebuilding and operational re-engineering, Britain’s banks are in much better shape than in 2008/09 and can take a punch from easing property prices.

The big banks are less involved in property speculation this time around. British banks held just around half the £183bn commercial property loan market at the end of 2015, according to research by De Montfort University. The strength of the banking system is another friction that seems to debunk the imminent-market-crash theory.

Good liquidity

The most compelling reason that builders, banks and property firms may not be as toxic as feared is that financial liquidity in the economy is much better than it was at the time of last decade’s credit crunch. Back in 2008/9 assets such as shares, property, bonds and commodities crashed in price because investors couldn’t put their hands on cash to invest.

Now the situation is different and banks, companies, investment institutions and individuals are swimming in money. They will likely invest by buying up shares, property and other assets as soon as they start to look cheap, thus preventing any weakness in asset prices becoming a rout.

Where to invest

There could be more headwinds for housebuilders, banks and property funds. But selective share picking, focusing on quality companies with as little cyclicality in their businesses as possible, could be the best strategy.

Cyclicality in a business model isn't entirely off the agenda but be sure to look for shares representing businesses with a good underlying growth story, decent profit margins, and meaningful returns on capital, such as the five firms identified by the Motley Fool's analysts.

Since the referendum result, all five of these super-companies are up, which is a powerful endorsement for the Fool's analyst team. You can find out the identity of these strong firms now by clicking here.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.