Fund managers raise exit penalties to prevent property collapse

Schroders, one of the UK's leading managers of commercial property investments, yesterday wiped 12.5 per cent off the value of units in its flagship £2bn fund, amid growing fears of a collapse in the sector.

The company also warned that investors in the fund might have to wait longer than usual to withdraw their money because of a serious downturn in the market. William Hill, Schroders' head of property, said: "The market has moved and there is nothing to be gained by us putting our heads in the sand and pretending otherwise." The 12.5 per cent reduction applies to the value of redemption units in the Schroder Exempt Property Unit Trust, one of the top performers in the sector. Institutional investors in the fund are required to give three months' notice of withdrawals but are usually offered the value of their units on the day they give notice.

Yesterday though, Schroders said it had amended its September valuation of Exempt Property downwards by 12.5 per cent for investors who have given notice of withdrawals. It also said they may have to wait longer than three months to get their money, because the fund manager is determined not to be forced into selling assets in a falling market.

Schroders is the second manager in a week to take drastic action to avoid being caught out by rapidly deteriorating investor sentiment on commercial property. M&G has also told institutional investors they may have to wait longer to get their money back.

CB Richard Ellis, the consultant, now predicts annual returns for commercial property will be down to almost zero by the end of this year – compared with an 18 per cent gain in 2007.

Figures from the Investment Property Databank show that total returns fell 1.5 per cent in October and 2.6 per cent over the past three months. The global credit crisis has made it increasingly difficult to find finance for larger projects.

The Bank of England last month identified commercial property as particularly vulnerable to a credit crisis-inspired slowdown. The problems could spread to the retail side of the sector – commercial property funds have been hugely popular with private investors over the past three years, with managers including M&G, New Star, Norwich Union and Scottish Widows all running vehicles that are capitalised at in excess of £1bn.

The worst-case scenario for investors in such funds is that a panic by unitholders withdrawing their money would force the managers to sell off assets at firesale prices in order to meet redemptions.

These managers have all stressed in recent weeks they do not foresee liquidity problems, though several have this year begun imposing exit penalties on investors selling their fund holdings. However, Richard Saunders, chief executive of the Investment Management Association (IMA), admitted investors were beginning to withdraw money from the sector. In July, August and September, there were net inflows to commercial property funds of £54m, £69m and £62m respectively, but new IMA figures will show this was reversed in October to a net outflow of £159m.

"Next week we will be publishing figures for October, which will show a modest outflow of 1 per cent of total assets of property funds," Mr Saunders said, though he added: "Redemptions at this level are well within the liquidity capacity of these funds and are perfectly manageable."

House prices fall again

Average house prices across the UK fell for the second month running during November, as the credit squeeze and effects of rising mortgage rates started to reverse the growth of recent years.

Housing analyst Hometrack said house prices fell 0.2 per cent in November, slightly faster than the 0.1 per cent drop in October. Year on year, however, prices are still up – by 3.6 per cent.

The slowdown was most evident in the number of potential buyers registering with estate agents. Some 9 per cent fewer people signed up with agents than this time last year, while almost 3 per cent less properties were put on the market.

"Continuing media focus on the fall out from the credit squeeze, along with relatively high interest rates, is resulting in widespread caution among homeowners, the majority of whom do not need to move," said Richard Donnell, Hometrack's research director.

The Hometrack report also revealed that sellers were now only receiving an average of 93.8 per cent of their asking price, compared to 95 per cent in September.

James Daley