BES investors must brace for large losses: Clients with pounds 70m invested have been hit by the collapse in property prices, as Caroline Merrell reports

JOHNSON FRY, one of the biggest sponsors of business expansion schemes, will be writing to thousands of investors this week with details of the losses they stand to make on their property investments.

Five years ago thousands of people were tempted into putting millions of pounds into BES companies that invested in residential property.

Many of these companies are now reaching the end of their five- year life with substantial losses because of the collapse in property prices. A lot of the money was invested at the end of 1988, just before the peak in property prices.

Johnson Fry is writing to 10,000 clients with a total of pounds 70m invested giving them details of the best way to proceed.

Charles Fry, managing director, said that investors would be looking at losses of between 15 and 50 per cent on their investment after tax relief. Higher-rate taxpayers would have received tax relief of 60 per cent on their original investments.

Mr Fry is advising his clients to leave their money invested, as he anticipates that the property market will improve over the next 18 months to two years.

The company is also offering investors cash for their shares. The amount of cash they will get will depend on an assessment of how much Johnson Fry believes the property would be worth in a forced sale.

Mr Fry said: 'The cash amount will be worked out by what the market value of the property would be if it had to be sold within a certain time - next March.'

He said those who opt to take the cash will get a lot less than the current valuation.

Twenty one of Johnson Fry's BES companies are currently reaching the five-year mark. To help cut costs on the administration of 12 of these companies, Mr Fry said that he planned to cut down on the number of directors and reduce their fees.

On these companies, he estimated that the losses would be as much as 50 per cent.

He said that clients had been contacted at the end of last year to find out whether they wanted to continue to stay invested in the companies in the hope of cutting their losses.

He said: 'Sixty to sixty five per cent wanted to stay invested.'

'The idea will be to sell sufficient properties in these companies to pay off those who want their money. Cash will be offered.'

Investors in the other nine, SCAT companies (small companies assured tenancy), are facing smaller losses because the schemes are insured through Eagle Star.

'Investors in these companies will be substantially better off. All investors will have a claim through the insurance policies.'

These investors are also being offered a cash exit route.

Another BES sponsor, Smith & Williamson, is writing to hundreds of investors in its Cavendish Wates First Assured BES to ask them what they want to do about their investments. Their options include selling the properties as they become vacant, continuing to stay invested or expansion by linking with other companies with the aim of becoming fully quoted.

The outlook for property is not too rosy. Halifax Building Society this week reported price falls for the second month running. Prices dropped by 1.6 per cent during May, bringing them to the same level as May 1993.

Housing experts have halved their expectations of price rises for 1994 to 2 to 3 per cent.