Recovery funds miss rally

Funds that tried to capitalise on the property crash have been outmanoeuvred by the speed of the correction, with most “property recovery” funds attracting little interest from investors. A slew of property recovery vehicles was launched over the past year to try and snap up assets at bargain prices.

But this week, a special report in FT Money’s sister title, the Investors Chronicle, reveals that property recovery funds have been collectively trying to raise £770m, but so far have netted just 2 per cent of
the target.

Standard Life has axed a planned £180m property recovery fund after the unprecedented rally in property markets scotched its hopes of buying bargain assets. The Assetz recovery fund had raised just £1.5m of its £25m target this week, while Walls & Futures London Growth Fund has raised £0.75m of its £10m.

Investor reluctance stems from the growing realisation that recovery funds have missed the market. According to the Independent Property Databank, commercial property values have rallied 13.1 per cent since August 2009. The weakness of sterling means wealthy foreign investors are competing for assets, pushing up prices.

Residential property recovery vehicles also have struggled to raise cash. In central London, house prices in many areas have exceeded 2007 highs. In January, Candy & Candy scrapped its £100m Growth Fund, which had intended to buy property in London’s “golden postcodes”, blaming the market’s “faster than expected recovery”.

The majority of recovery funds are closed-ended in structure, requiring a substantial upfront investment that is locked away for up to seven years. Fund managers can only buy property once money is raised, and the delay in entering the market has made a mockery of hoped-for returns of up to 15 per cent a year.

“A year ago, it was doubtful that many of these closed-ended vehicles could deliver the high returns they were promising private investors. Now that the property market has gained a little ground, achieving those returns is a near-
impossible task,” says Neil Young, chief executive of residential investment specialist the Young Group.

But fund managers argue they have not missed the market. Stuart Law of Assetz says “there will be about five times as much in the next fundraise” as investors see the first acquisitions, while Joe McTaggart of Walls & Futures says: “It’s a bit like a school disco. Nobody likes to be first on the dancefloor, but as soon as someone gets out there, it all goes crazy.”