Liquidity question hangs over leading property funds by Finance News Bulletin

Published: 04/12/07

All times are London time look for News in the FTcom siteSearchSearch speech marks in the FTcom sitespeech marksYOUR MONEY Your investmentsBreadcrumb trail navigation:FT house > Your money > Your investmentsServicesThe natural impulse of investors to flee a commercial property marketplace going through its worst period since the near the beginning 1990s has begun to test liquidity levels in sure UK fundsThere are worries that UK property funds will not have the money to pay exiting investors, and will be unable to sell possessions fast enough in what is a tough transactional market to lift the money

“There is obviously a mismatch between the illiquidity of the asset and the liquidity of the faith structure, which investors could find to their price,” says Mike Prew, Lehman Bros property analystThis week, FT cash contacted every fund manager in the sector to measure sentiment, and ask whether liquidity levels had reached a crisis pointReassuringly, none said there was any immediate danger of preventing investors from send-off – although many reported that they are now selling properties to make sure liquidity levels are maintained saver flows are now flat or unenthusiastic in almost all funds

Most admitted worries for the short term, particularly if investor sentiment continued to acid, but expressed expect that investors would stand by property as a long-term asset and an important portfolio diversifier They also said the overall return this year will be flat, with a alike performance predictable next yearOn the face of it, the market does not inspire self-assurance In September there was the first monthly decline in total income since 1992, with income then sliding between 2 and 5 per cent in the last few months and forecast to carry on to decline for anywhere between six to 24 months

Closed-ended funds and property companies have knowledgeable crashing net asset values, and even more disastrous share price performances Shares in Real Estate asset Trusts (Reits) have dropped some 38 per cent in the day to date, suggesting the marketplace is pricing in further falls in asset valuesThe performance of open- broken funds invested in property shares has been similarly dismal, but while they undergo by having to sell shares into a miserable market, at least they can lift cash to pay departing investors The new worry is that unrestricted funds invested directly in property will struggle with this

To date, the awful news has all come from institutional funds Last week, M&G said institutional investors in an offshore property fund would need to stay three months to exit, while Schroders put a similar time boundary on a property faith and cut the value by more than 12 per cent William mount, head of property at Schroders, admits “the market has moved and there is nothing to be gained by us putting our heads in the rub down and pretending otherwise”Charles Cade, analyst at Winterflood Securities, expects the investor exodus to continue and believes that the main retail funds could now also be compulsory to impose limits on redemptions

To do so, funds would have to apply to the Financial armed forces Authority (FSA) for the right to defer payments, something that was last called on in the property sector by a housing fund run by Henderson in the early 1990sThere are around 20 authorised property component trusts easily available to the UK investor The main, run by Norwich Union, has seen fluid assets drop from 184 per cent at the finish of July to 12

4 per cent at the finish of October The fund’s dimension has dropped from £41m to £36m

Norwich Union would not comment on whether it would need to sell possessions, but others are less shy Barry MacLennan, director at Standard existence Investments, says its fund has built up a healthy 28 per cent in liquid possessions, partly through property sales since the summerLegal & General’s property faith has seen liquid possessions drop from 192 per cent at the finish of July to 17 per cent this week

But unlike most in the sector, Mike Barrie, manager of fund organization at L&G, says investor flows are still positive, although the last few weeks have seen redemptions rise The fund has already sold property to uphold a “prudent” cover for exiting investors, he saysThe SWIP property trust has around 7 per cent in cash, down from 115 per cent at the finish of July

A spokesperson says that it “has money within the fund to meet redemption levels”New Star has sold some equities from its possessions trust, raising the cash place The fund now allocates 152 per cent to shares, from 17

3 per cent at the finish of July, and 95 per cent in cash, up from 78 per cent There have been total redemptions of around 5 per cent since July

M&G says flows have lately turned negative in its possessions fund, with daily withdrawals at around £1m last week, but adds there is a liquidity shock absorber of some £70mJohn Willcock, manager at Threadneedle, would not comment on the exact level of liquidity within its finance, only saying it was “healthy”Jonathan Polin, a manager at Resolution, says flows have turned “slightly unenthusiastic but stressed that overall redemptions had proved quite small so farLike most in the division, Resolution’s fund moved to its “cancellation price” some time before, he adds, which means that exiting investors receive the lowly possible unit price

Polin says the fund has a liquidity level of around 10 per cent, which has been quite static He stresses that property is still a good investment in malice of the cyclical slumpMacLennan of Standard Life says predicts a “short, pointed shock”, rather than a sustained slump “The sentiment is worse than realism at the moment,” he adds

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