Commercial property funds suffer devaluations

Open-ended commercial property funds have ended their worst period for 15 years on a suitably dour note but there are signs of investor optimism returning for property companies.

On Thursday, 118,000 policyholders in Friends Provident’s £1.2bn UK commercial property funds were told that it could take up to six months to withdraw or switch money, because of a cash liquidity crisis.

Clerical Medical, part of HBOS, also this week became the latest to be forced into an exceptional devaluation of commercial property funds, slashing 19 per cent off the value of units in its four retail trusts, worth some £2.3bn.

The fund manager moved property valuations to a weekly basis, a similar strategy to others who are wondering just how far values will drop.

Property held in the largest funds run by New Star and Norwich Union has fallen in value by more than 17 per cent since the end of July. Both managers recently moved to valuing property every two weeks. In the first such valuation on December 14, Norwich Union saw a reduction of 2.6 per cent over the two weeks while New Star’s first two-week valuation on December 10 saw a drop of 8.2 per cent.

These figures are unlikely to help the growing liquidity crisis within some funds in the sector. Norwich Union’s liquid assets – cash and shares – fell 5 per cent to hit 7.5 per cent in November.

Other funds have reached just 5 per cent in liquid assets, including Skandia’s property trust, nearing the critical point at which they would need to limit redemptions and therefore give them more time to sell property to pay exiting investors.

Sales seem to be matching redemptions in some trusts. Scottish Widows Investment Partnership told FT Money that liquidity levels at its £1.3bn property trust rose midweek to 6.5 per cent from 5 per cent following the sale of a building. “For some funds, it is a case of whether sales can keep pace with redemptions right now,” said one fund manager, who asked not to be named.

Some are seeing signs that outflows are abating. New Star says there had been a noticeable drop in redemptions in the past two weeks, adding that investors now believe values are not going to fall much further.

But it is the closed-ended property funds and property companies that are showing the most obvious signs of optimism, with price discounts to net asset value seen by some analysts as pricing in potential risk.

The battered property company sector, where the discount to net asset value this week went to 46 per cent for British Land and 36 per cent for Land Securities, is attracting contrarian investors. This is in spite of a further slide in property shares this week following the release of data showing worst-ever monthly returns.

Anthony Bolton, Fidelity’s star fund manager, has now started to buy property stocks, telling his special situations trust there are discrepancies in valuations.

Others are seeing value in the closed-ended investment trust sector, where average discounts for funds invested in property in both the UK and Europe exceed 35 per cent. There are also large discounts in companies that hold property shares.

Richard Scott, who runs a fund of investment trusts at Iimia, recently bought back into the sector with a stake in TR Property.

Invesco Property Income trust reached a discount to net asset value of 72 per cent this week, pricing in a disaster that the company avert-
ed earlier this week after agreeing an extension to its bank loans, according to Simon Moore, analyst at Collins Stewart. “There are definitely discrepancies in valuations by the broad-brush drop in values,” he said.