Friends Provident took the unprecedented step yesterday of warning 118,000 investors in its 1.2bn Property Fund that they will not be allowed to withdraw their money for up to six months. The fund manager said so many people had taken cash out of the fund in recent months that it would soon have to begin selling property assets to meet future demands for withdrawals.
Like other funds invested in illiquid commercial property assets, Friends Provident's vehicle usually keeps 10 to 15 per cent of its holdings in cash and shares, in order to meet short-term demands for cash from investors redeeming their units. But this buffer has now fallen to around 5 per cent, prompting the restrictions announced yesterday.
A spokesman for Friends Provident said: "The alternative would be to sell properties quickly, which would result in a lower sale price being achieved."
The move is a very serious development for the commercial property sector, which has been rocked in recent months by falling returns and a collapse in investor confidence. While the sector was hugely popular with investors in 2006, particularly for those using up tax-free individual savings account (ISA) allowances, there have been increasing fears of a sell-off during the past six months.
Fund managers including Schroders, M&G, Deutsche Bank and UBS have all put restrictions or penalties in place on their property funds in recent weeks, though none have gone as far as Friends Provident, which is desperate to avoid being forced into a firesale of assets.
CB Richard Ellis, the property consultant, is now predicting that total returns from the sector will be down to almost zero by the end of this year compared with an 18 per cent gain in 2006. The Bank of England has also warned that the commercial property sector is particularly vulnerable to a credit crisis-inspired slowdown.