Commercial property managers in race to prevent investor panic

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The Independent Online

Britain's largest commercial property managers rushed to prevent a run on their funds yesterday, as investors began to panic following Scottish Equitable's decision to prevent some investors from withdrawing their savings for as long as 12 months.

Norwich Union, which runs the UK's biggest property fund, was forced to issue a statement reassuring investors that its fund still had cash balances of 6.5 per cent, and would continue to allow customers to redeem their investments without any wait. Standard Life also said it had sufficient liquidity in its fund to manage any future withdrawals.

Scottish Equitable confirmed it was temporarily closing the door to withdrawals from its commercial property fund yesterday, informing customers that they may have to wait up to a year to get their hands on any money they have in the fund.

The move followed a similar announcement last month by Friends Provident, which told investors they will have to wait six months to make withdrawals out of its commercial property fund. UBS, Schroders and M&G have also all put 90-day or six-month waiting periods on their institutional property funds.

The deferments are being put in place to slow down the level of withdrawals from the funds, whose assets cannot be easily liquidated. While all property funds keep a proportion of their funds in cash, to allow for day to day withdrawals, these buffers have been run down over the past six months, as large numbers of investors have begun cashing in their holdings due to fear of a full blown commercial property crash. If the funds were forced to sell properties at short notice, they would be likely to end up achieving a much lower price for the assets, piling more pain on the remaining investors in the fund.

New Star became one of the first to try to stem the level of withdrawals from its property fund last summer, changing the pricing by only allowing unitholders to sell out at a larger discount than usual. Several other property funds followed suit.

The vast majority of those affected by the Friends Provident and Scottish Equitable decisions hold the property funds within pensions – which they are not permitted to cash in until they are 55.

Both groups have said customers who want to vest their pension as they reach retirement, or who are claiming death benefits on a life insurance policy, will still be able to cash in their investments in the property funds.

For investors in unit-linked bonds, who want to get their hands on their money as soon as possible, Scottish Equitable said the length of the waiting period would depend on when they had taken out their policy. Money invested before January 2005 is only subject to a one month deferment. However, savings invested after the start of 2005 are subject to the full 12 month wait.

Mark Dampier, the head of research at financial advisers Hargreaves Lansdown, said there had been a "Northern Rock" effect with commercial property investments. "Hardly anyone wanted their money until they were told they couldn't have it," he said.

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