Investors flood out of commercial property funds as returns drop

The amount of money being withdrawn from commercial property funds inc-reased almost twelvefold during the last three months of 2007, as investors rushed for the exit in a panic-stricken response to sharp falls in asset prices.

Figures released yesterday by the Association of Real Estate Funds (AREF), reveal that £1.65bn was redeemed from members' funds in the final quarter of last year, up from total redemptions of just £139m in the three months to the end of September 2007.

Total returns on pooled property funds were down some 9.1 per cent in the final quarter, the lowest quarterly return since the Investment Property Databank (IPD) started records in 1990. Some funds fared much worse, however. According to the IPD, the Junction Fund – an owner of retail strip malls – saw its value fall by more than a quarter during the last three months of the year.

Shares in Capital & Reg-ional, the listed commercial property group that manages the fund and owns a 27 per cent stake, have fallen by almost 75 per cent over the last year.

Rachel McIsaac, the chief executive of AREF, said part of the reason for the sharp correction in prices was the increased availability of data over the past few years. "A year on from the release of our first [report], the importance of a transparent market has never been higher," she said. "The market has re-priced sharply, a function of the wide availability of accurate market data."

Redemptions in the first quarter of 2008 could have been even worse were it not for the moves by several large fund-management companies to prevent investors making any withdrawals from their funds for up to a year.

Friends Provident was the first to move, placing a six-month deferral on withdrawal requests from its commercial property fund in December. Scottish Equitable followed a few weeks ago, imposing deferral periods of up to a year, while Scottish Widows and Axa have also made similar moves.

The funds have been forced to stop investors making withdrawals due to the limited amount of liquid assets left in their portfolios. Any further withdrawals would force funds to make emergency sales of some of their properties, almost certainly realising a much lower price than if they'd waited.

Meanwhile, however, funds that continue to permit withdrawals are still seeing high volumes of redemptions. Norwich Property and New Star Property have seen their cash and equity reserves run right down over the past few weeks, in spite of changing their pricing to discourage withdrawals.

The high level of redemptions has triggered fears of a crisis in the commercial property sector, one of the most popular asset classes with investors as recently as a year ago. While many independent financial advisers are urging investors to take a long-term perspective, others have begun to tell clients to dump their holdings.

Further disposals would whittle down the disposable assets available to fund managers to fund withdrawals, forcing them either to begin selling off properties at today's depressed prices or to impose additional restrictions.