Several of Britain's largest commercial property fund managers quickly mobilised themselves to fend off a potential run on the sector yesterday, changing the pricing on their funds so that investors would have to pay a higher price than usual to sell out of their investments.
Scottish Widows Investment Partnership was the largest of a handful of managers believed to have switched their pricing yesterday, following in the footsteps of New Star Asset Management, Norwich Union, M&G and Standard Life. Investors in these property funds will now have to pay between 4 and 7 per cent of the value of their investment to exit the fund - until the management companies reset their pricing.
The changes in pricing have come in response to several institutional investors selling down their commercial property holdings over the past few weeks, leading to net outflows across a number of funds. Investors are usually spared an expensive exit from such funds, as managers offset inflows against outflows. However, when more investors are selling than buying, the managers reserve the right to let investors sell out only at the "cancellation" price, which on a property fund can be several percentage points lower than the regular sale price.
Andrew Wilson, head of investment at Towry Law, the financial advisers, explained that the additional cost for sellers protects those who remain in the fund, claiming the change in pricing was "good news for us and other long-term holders". He said the additional charges merely covered the cost of unit holders selling out, adding that they helped to protect the fund from being forced to sell properties, which would be costly.
Rob Page of New Star Asset Management said that outflows from his firm's property fund had been small - around £5m out of a fund worth £2bn - adding that the pricing change would be reversed as soon as the fund returned to net inflows.
However, Justin Modray of BestInvest, the London-based financial advisers, questioned whether the fund managers' motives were solely to protect long-term investors' interests. "The fund groups are not profiting from this, but, if you were cynical, you could argue that they're only doing this to protect assets.
"New Star has almost 30 per cent of its fund invested in shares and other liquid assets, so it's not in danger of being forced to sell any properties. If outflows really are as small as they're saying, and they don't expect them to continue, then why bother changing the pricing? You can't help feeling they're being a bit heavy-handed."
Commercial property has seen total returns well into double digits over the past few years, causing a large amount of private investors to pile into the sector. However, returns have been falling over the past few months.
Mr Modray believes that too many people had jumped on the commercial property bandwagon, expecting the high returns to continue, and that the majority would never have been told about the possibility of having to sell out of the fund at a discount.