While the amount at issue isn’t large by global finance standards, the fact that one of the UK’s biggest property funds had to stop withdrawals is not a good sign about the damage that falls in real estate prices are inflicting on investors’ psychology and balance sheets.
The Guardian and the Financial Times reported on the freezing of the £2 billion property fund, managed by Scottish Equitable, which had invested in office building and shopping centers. From the Guardian:
The move prompted fears of a Northern Rock-style run on billions of pounds invested in once high-flying funds which many savers have seen as a safe haven for their pensions.
Scottish Equitable said yesterday that 129,000 small investors in its £2bn property fund will not be able to access their money for up to a year, although payments relating to regular income already being paid, retirements and death claims will not be affected.
It said the fund, invested in London office blocks and shopping centres across Britain, no longer had sufficient cash reserves to meet demands from investors wanting to withdraw their money. Its “buffer fund” was down to 1% of its total assets, instead of the usual 10-15%…
In late December another insurer, Friends Provident, halted access to its £1.2bn property fund and last night speculation was growing that Scottish Widows may be on the verge of restricting customer withdrawals on some of its funds. The insurer said last night: “We are looking at all the options, but no decisions have been taken.”
Scottish Equitable’s parent group, Aegon UK, is due to announce the closure of its fund today. It said last night: “Aegon UK has decided to take this step to protect investors following a significant level of customer withdrawals from the UK property fund market.” It blamed “worldwide phenomena relating to concerns over the US sub-prime mortgage market fallout, rising interest rates and talk of recession”…..
Financial advisers continue to recommend that investors take their cash out of the funds that remain open. Jason Hemmings of Albannach Financial Management in Edinburgh said: “There are lots of rumours going about that other providers may be considering following Friends Provident and Aegon.”
The Aegon/Scottish Equitable property funds are managed by Morley Fund Management, which also runs the £4bn Norwich Union Property unit trust, the UK’s biggest property fund. This week Norwich Union said the fund had fallen in value by a fifth over the year, but its cash buffer was at 6.4% after selling office blocks in London and Manchester worth £165m.
Aegon UK added that it believes the “underlying fundamentals of the asset class remain healthy”.
From the Financial Times:
Retail investors in insurer Aegon’s £2bn Scottish Equitable property funds have been told it could take as much as a year to withdraw money after cash liquidity levels reached a critical point in the wake of the subprime crisis.
The insurer is the second to impose such restrictions on its retail funds. Friends Provident introduced similar measures shortly before Christmas, when 118,000 investors were told they might have to wait up to six months to see their cash.
A number of institutional funds have also imposed similar measures over the past few months. Scottish Equitable funds now have just 5 per cent in liquid assets following a run of investor money.
The property industry is going through its worst downturn for 15 years, with the assets held by funds seeing sharp losses over the past six months, leading to a wave of redemptions as investors have looked to escape the sector.
The restrictions – to be announced today – affect the Scottish Equitable property fund, Select Reserve fund and Select Distribution fund.