New redemption fears for property funds

There is no sign that the investor exodus from UK commercial property funds is abating, adding to fears of redemption limits as fund liquidity continues to suffer.

Data provided to FT Money by Cofunds, the leading independent retail investment platform, indicate that net outflows are still accelerating.

Around £9m of retail investor money was withdrawn from the five largest commercial property funds in November on the Cofunds platform, more than double that in October, which saw an average net outflow of £4m. Just £300,000 was withdrawn in September

Before the summer, a monthly average of £13m was invested in the five funds over the year to July.

The data will add to worries about investor confidence in the sector.

Fund managers argue that the long-term fundamentals of property are still solid – with consensus predictions of good occupier demand and continued rental growth – but a steep decline in asset values since the summer and, consequently, total returns, has spooked investors. Most commentators predict that the downturn in values will be sharp but short. In November alone, values of underlying property in a number of retail funds run by managers such as Norwich Union, M&G and Resolution dipped by up to 7 per cent.

Tim Cockerill, of Rowan Asset Management, said that the firm had withdrawn the remainder of its investors’ money from the sector this week.

Rowan had held around £2.5m in the New Star UK property fund, which it mostly switched into the fund manager’s global property fund, while it withdrew around £1.5m from the Norwich property unit trust.

Cockerill fears that Norwich Union, in particular, could be the first to experience difficulties.

The fund manager is understood to have seen liquidity levels – the buffer of cash and shares – drop to around 7 per cent last week in its £3.6bn unit trust.

The fund held liquid assets of more than 12 per cent in October, and more than 18 per cent in July.

If investors continue to exit, and money from sales does not arrive fast enough, then Norwich Union would be forced to ask the Financial Services Authority to delay redemptions.

“We have sold all our UK property funds as we’re anticipating that there will be a limit to redemptions put in place,” says Cockerill.

Cockerill was told by Norwich Union this week that it was waiting for property sales of around £200m to complete.

Norwich Union would not comment on the figures but has admitted that it is preparing for all eventualities.

“The emphasis right now is on managing liquidity in a composed way,” said a Norwich Union spokesman earlier this week. “A responsible firm such as Norwich Union would always consider contingency plans.”

So far, only institutional funds have had to impose restrictions on investors.

This week, it emerged that institutional investors in funds run by Deutsche Bank and UBS, as well as Morley’s pension property fund, have been told that they will need to wait up to a year to withdraw money.

William Hill, head of property at Schroders, which last week cut the value of units in its £2bn property unit trust by 12.5 per cent, said the majority of redemptions were coming from funds of funds with their own liquidity issues.

But retail fund of fund managers deny any rise in their own redemptions.

Richard Philbin, head of fund of funds at F&C, says its multi-manager distribution fund had been running at its lowest exposure to property, 20 per cent, since June. “We’re as negative as we can be at the moment but it is a long-term investment which we will continue to hold,” he adds.

The commercial property market has enjoyed extraordinary growth over the past few years, which led to an investment stampede that some likened to the dotcom boom.

However, almost all the worst-performing funds this year have been in the property sector, with those invested in property equities performing particularly badly as a result of the collapse of real estate investment trusts.