As possible financial trouble spots go, this is far from the biggest. UK property funds are a £10 billion industry. But after the Northern Rock debacle, the last thing the UK needs is another panic where investors pull withdraw their balance from vehicles that can’t take large scale redemptions.
The problem with UK property trusts at heart is that it’s a badly designed product. Who in their right mind would establish a fund that invested in illiquid assets (in this case, commercial real estate) yet by law is required to give investors ready access to their holdings?
From the Telegraph:
Britain’s £10bn retail property fund industry is balancing on the edge of a liquidity crisis that could force funds to turn away investors looking to withdraw cash.
Figures to be released this week are expected to show that cash levels in funds such as Scottish Widows Investment Partnership (Swip) and Norwich Property Trust (NPT) have halved as tens of millions of pounds have been withdrawn in just one month.
Property funds invest in a wide range of commercial real estate, from department stores to prestige office developments
The Sunday Telegraph has learnt that the Swip’s cash holding has fallen from 10 per cent to just 5 per cent of its £1.2bn commercial property fund over the past month. Concern about a potential crisis has forced emergency meetings both at the Financial Services Authority and among the fund managers about how they can stem the run on the funds and whether they will have to restrict redemptions.
Gerry Ferguson, the fund manager for Swip Property Trust, said: “We are monitoring liquidity levels in the funds and looking at ways of managing it. This may include short-term borrowing. The FSA is talking to fund managers because of difficulties in the underlying market.” Although Ferguson said that Swip had not held talks with the FSA about restricting redemptions, other funds such as Norwich Union’s NPT are understood to be drawing up plans to cope with the problem.
The problem for managers of these open-ended funds is that they are required by the FSA to offer investors immediate access to their funds but are struggling to sell assets to fund such redemptions in a commercial property market that is paralysed.
Research from Jones Lang LaSalle, the commercial property agent, suggests that transaction volumes in the market have fallen from around £18.6bn per quarter to £5bn over the past year.
Uncertainty over pricing in the market and expectations that valuers will knock a further 8 to 10 per cent from valuations in the current quarter have left commercial property buyers reluctant to enter the market.
Funds run by investment houses for institutional investors have already had to impose limits on withdrawals. Schroders, UBS and Deutsche have all had to warn investors that they may not be able to get their money back in the normal three-month period.
A spokesperson for the FSA said: “We are monitoring the situation with property funds and their redemption policies closely.”