When reality dawned, the reaction was swift. For one corner of the U.K. investment industry, it's not clear where it will stop.

Funds investing in commercial property, among the most popular last year, had started to show vulnerability in the months before Britain's June 23 referendum on leaving the European Union. Withdrawals accelerated as opinion polls turned in favor of the "Leave" campaign, driven by concerns that international companies might shut or scale back London operations even if financial markets and betting odds suggested that a so-called Brexit was unlikely.

At noon on Monday, just 11 days after the referendum result shocked the world, Standard Life Investments declared it had suspended its U.K. Real Estate fund as people tried to get their money back. By Thursday afternoon, seven funds together overseeing about 18 billion pounds ($23.4 billion) had shut the door to prevent unnerved customers forcing fire sales of offices, shopping malls and warehouses.

"As soon as Standard Life suspended their funds, it caused contagion," said Jason Hollands, managing director at investment firm Tilney Bestinvest. "The key point here is no one really knows where U.K. property prices are going."


This story is based on interviews with people directly involved in the unfolding saga. They asked not to be identified because they were speaking about confidential proceedings.

Asset managers had already identified their soft underbelly. As Britain woke up to its shock decision to leave the EU, the board that oversees mutual funds at Henderson Group Plc gathered in London to discuss the potential fallout. Top of the agenda was real estate.

Within hours of the result on June 24, broker CBRE Group Inc. warned that prices would likely come under pressure. The pound sank to the lowest level in three weeks and sell orders began to mount. Before the referendum, about 25 billion pounds were in U.K. real-estate funds, less than 5 percent of the amount in stocks, but enough to cause concern among the asset managers.

Henderson swiftly cut the market value of its 3.9 billion-pound property fund by 4 percent to deter people from rushing for the exit. Redemptions were rippling through the industry. As wealth managers and fund of fund managers sought to reduce their clients' exposure, Standard Life and Aberdeen Asset Management Plc also began to cut the value of their funds to help manage the outflows and protect their remaining investors.

"We don't know how deep the fault lines run," said Laith Khalaf, senior analyst at Hargreaves Lansdown, which sells funds to individuals in Britain. "The mark-down in asset prices is really an educated guess, and it may not be borne out by real-world transactions, for better or worse."

To protect from a sudden surge in withdrawals, funds have a proportion of their assets in cash, especially if the investments are in something that takes time to sell such as office blocks. Some property funds were more than 20 percent cash before the Brexit vote. Others, including the 4.4 billion-pound Property Portfolio at M&G Investments, had just 7.7 percent. It was too late for funds to raise more cash.

At the back of everyone's mind from the regulator to the chief executives of the U.K.'s largest asset managers was the 2008 financial crisis. Real-estate funds were forced to freeze assets and contributed to a slump in property prices in Britain of more than 40 percent from their peak.

Henderson's board, which would normally meet quarterly, started to meet daily as outflows continued. The Association of Real Estate Funds, urged by the regulator, organized group conference calls with its key members to help gauge sentiment among investors. No emergency plans were discussed.

Then, news came from Edinburgh. Standard Life had reluctantly suspended its 2.9 billion-pound U.K. Real Estate fund. About 13 percent of the fund was liquid, but with no let-up in withdrawals its managers froze the assets on July 4 to preserve remaining cash and avoid having to sell holdings on the cheap. It gated a similar property fund during the 2008 crisis.

Standard Life didn't have time to pick up the phone to inform its biggest clients why the decision was taken. Instead, it hurried out a statement, citing uncertainty in the U.K. commercial real-estate market following the referendum.

"The selling process for real estate can be lengthy," the company said. "Unless this selling process is controlled, there is a risk that the fund manager will not achieve the best deal for investors in the fund, including those who intend to remain invested."

Panic accelerated outflows. As the Financial Conduct Authority requested information from the funds sometimes hourly, its new chief, Andrew Bailey, told journalists it was time to look again at the design of illiquid funds sold to individuals. On Tuesday morning, Aviva Investors' 1.8 billion-pound Property Trust was the second to succumb to redemptions, quickly followed by Henderson, M&G, Columbia Threadneedle and Canada Life.

That same day, the FCA held a meeting with the CEOs of about eight of the largest funds at its office in Canary Wharf in east London to discuss measures available to contain the fallout. The FCA declined to comment.

In a bid to avoid the same fate as other firms, Legal & General Group Plc and Kames Capital have cut the value of assets by as much as 10 to 15 percent. Aberdeen Asset Management has gone one step further and suspended its fund, which still has 500 million pounds of cash, until Monday, to give some investors time to reconsider their sell orders after they lowered their fund's value by another 17 percent, following an earlier cut of 3.75 percent.

"What's happening today is very similar to what we saw back" in 2008 in relation to redemptions, said Muna Abu-Habsa, a senior analyst and property sector specialist at Morningstar in London. "Unfortunately, we have not seen much changed by way of structure or regulation."

As the dust settles and comparisons are drawn with 2008, firms that froze assets have bought time to assess the damage from the referendum. Some have already engaged real estate brokers to determine which assets could be sold as private equity firms and sovereign wealth funds circle, looking to snap up cheaper properties.

"We're getting calls all over the world asking 'would you like to sell us your assets?'," Aberdeen CEO Martin Gilbert told Bloomberg Television. We may see "retail investors selling near the bottom and institutional investors from abroad coming in and taking advantage of the weak currency."