No way out: The sky falls in on commercial property

Funds that looked as safe as houses are now sliding in value, and those seeking to escape must pay a penalty. Is all hope lost? asks Esther Shaw

For many investors who have piled into commercial property funds over the past few years, the dream is turning sour.

When the market was booming, these funds looked a sure-fire bet. "Investors saw them as the 'golden egg'," says Phil-ippa Gee of independent financial adviser (IFA) Torquil Clark. However, with the world economy slowing, the credit crunch in full swing and general worries over property after the collapse in house prices in the US, the value of commercial property investments is on the slide.

"Funds such as New Star have experienced a loss of almost 20 per cent in the past year," says Ms Gee.

Unsurprisingly, many investors want to bail out, but barriers have been put in their way. Penalties, normally ranging between 2 and 7 per cent of the value of the investment, are being imposed on those taking out their money.

Standard Life, Prudential, AXA and New Star are among those that have already applied a penalty, and a few weeks ago insurer Friends Provident went further and suspended redemptions on its £1.2bn property fund for six months. In effect, this means investors cannot get their cash back until the summer at the earliest.

A spokesman for Friends Provident says its decision "reflects the general sharp decline in investor demand for UK commercial property in 2007, brought about by the credit crunch.

"We were seeing a considerable increase in the number of redemptions, with people surrendering units or switching to other funds," he adds.

The crux of the issue for providers is liquidity, says Dean McCarthy from IFA Cobalt Capital. "There are problems if people start panicking and want to withdraw their cash, as that money is tied up in property," he explains. "But fund rules state that in times of poor liquidity, the manager can reserve the right to impose a time restriction or 'lock-in'.

"If investors took their money out, the fund would then be forced to sell property, probably at below market rate," he continues. "This would mean the existing investors would get penalised because of those pulling out. The lock-in is a move to try to put off the short-term profit hunters."

But not all are convinced by this argument. "For many people, it was a case of out of the with-profits frying pan and into the inferno of commercial property," says Peter McGahan at IFA Worldwide Financial Planning. "Property funds may have looked like a safe asset but they are not, and at a time like this when fund managers can lock in investors for six months, people should think about getting out."

Ms Gee at Torquil Clark is more optimistic, pointing out that while New Star's UK property fund has plummeted 20 per cent in the past year, over five years it has grown by 35 per cent.

"No one should take the last year as a demonstration of what will be achieved in this sector in the future," she says, adding that while returns are likely to be muted over the next few years, there is still a place for commercial property funds as part of a balanced investment portfolio.

"That there are currently reductions posted on these funds makes them a much more attractive proposition, and some people are looking to capitalise on that by investing now."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Arts and Entertainment
filmPoldark production team claims innocence of viewers' ab frenzy
Life and Style
Google marks the 81st anniversary of the Loch Ness Monster's most famous photograph
techIt's the 81st anniversary of THAT iconic photograph
News
Katie Hopkins makes a living out of courting controversy
people
News
General Election
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Sales Team Leader - Wakefield, West Yorkshire

    £21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...

    Ashdown Group: Head of Client Services - City of London, Old Street

    £45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

    Why Mohammed Emwazi chose Isis

    His friends were betrayed and killed by al-Shabaab
    'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

    Open letter to David Cameron

    Building the walls of fortress Europe has had deadly results
    Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

    You don't say!

    Tory candidates' election tweets not as 'spontaneous' as they appear
    Mubi: Netflix for people who want to stop just watching trash

    So what is Mubi?

    Netflix for people who want to stop just watching trash all the time
    The impossible job: how to follow Kevin Spacey?

    The hardest job in theatre?

    How to follow Kevin Spacey
    Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

    Armenian genocide and the 'good Turks'

    To continue to deny the truth of this mass human cruelty is close to a criminal lie
    Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

    'Lou needed care, but what he got was ECT'

    The truth about the singer's upbringing beyond
    Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

    This human tragedy has been brewing for years

    EU states can't say they were not warned
    Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

    Women's sportswear

    From tackling a marathon to a jog in the park, the right kit can help
    Hillary Clinton's outfits will be as important as her policies in her presidential bid

    Clinton's clothes

    Like it or not, her outfits will be as important as her policies
    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders