Fight or flight: The UK property fund dilemma

As the UK commercial property market slumps to its lowest levels since the early 1990s, the natural flight instinct of investors is beginning to kick in, says Daniel Thomas in the Financial Times. A phenomenon that it testing liquidity levels in local funds.

The major concern is that UK property funds will not have the cash to pay exiting investors, and will be unable to sell property fast enough in what is a tough transactional market, says Thomas.

Another fear is that managers will lock remaining investors in their schemes to prevent a crash, says David Budworth in The Times(UK).

Some financial advisers are recommending investors with big profits cash in their gains before the doors close.
On this advice, says Hargreaves Lansdown financial adviser Mark Dampier, "we could see a lot of money coming out, and fund managers might have to react by imposing exit penalties or waiting periods to get your money back.

"It could be like the penalties on with-profits funds, which insurers said would only be in place for a few months during the bear market but they're still there. If you're in for 10 years I'd say there's no reason to sell, but if you're in for less it may be time to consider it.”

Already, says Budworth, one of Britain's biggest property investors, M&G, has warned institutional investors wanting to get their money out of its offshore property fund that they now have to give 90 days' notice.

Schroders has also told investors they may have to wait more than three months to get their money after it received calls to redeem £100m from its £2 billion Exempt Property Trust.

Billions are at stake here, says Budworth, as property funds have been hugely popular over the past three years, sparked by stellar returns: 55 per cent in the three years to the end of 2006, according to the Investment Property Databank.

Retail investors hold about £16 billion in property funds and the sector took £2 billion in the six months to April alone.

On the face of it, the market does not inspire confidence, says Thomas. September saw the first monthly decline in total returns since 1992, with returns then sliding between 2 and 5 per cent in the last few months and forecast to continue falling for anywhere between six to 24 months.

Closed-ended funds and property companies have suffered crashing net asset values, and disastrous share price performances. While shares in Real Estate Investment Trusts (Reits) have dropped some 38 per cent in the year to date, suggesting the market is pricing in further falls in asset values.

The performance of open-ended funds invested in property shares has been similarly dismal, but at least they can raise cash to pay departing investors, says Thomas. The new worry is that open-ended funds invested directly in property will struggle with this.

Liquidity question hangs over leading property funds, Daniel Thomas, Financial Times

Locked in the property fund trap, David Budworth, The Times