Northern Rock-Style Run on Property Funds

The Guardian, Friday January 18 2008:

• One of Britain's biggest property funds was forced to shut its doors to withdrawals yesterday after the slump in commercial prices triggered panic selling by small investors.
• Scottish Equitable said yesterday that 129,000 small investors in its £2bn property fund will not be able to access their money for up to a year, although payments relating to regular income already being paid, retirements and death claims will not be affected.
• Commercial property values, especially in the City of London office market, have dived amid fears of a recession brought on by the global credit crunch.
• In late December another insurer, Friends Provident, halted access to its £1.2bn property fund and last night speculation was growing that Scottish Widows may be on the verge of restricting customer withdrawals on some of its funds.
• Scottish Equitable's parent group, Aegon UK, is due to announce the closure of its fund today. It said last night: "Aegon UK has decided to take this step to protect investors following a significant level of customer withdrawals from the UK property fund market." It blamed "worldwide phenomena relating to concerns over the US sub-prime mortgage market fallout, rising interest rates and talk of recession".
• The crisis in Britain's commercial property market is now worse than at any time since the early 1990s, when Olympia & York, the company that began the Canary Wharf office development in London, went into administration.
• Small investors have put about £15bn into property unit trusts - £5bn pouring in during 2006 and early 2007 alone. Billions more are invested through pension funds held by millions of company employees. Investors bought into promises of rich returns after a decade in which returns far outstripped gains on shares or bonds.
• But the downturn in values since the middle of 2007 has been savage. Shares in British Land, the UK's leading property company, have fallen by nearly half, and most funds are showing falls of between 20% and 40%. But investors stampeding for the exit are now finding that they cannot access their cash.
• The crux of the problem is that the funds are invested in buildings which can take months to sell, and therefore cannot produce the cash to pay out money to small investors if they all want it back at the same time.
• Usually the funds hold a cash "buffer" of 10-15% of total assets to meet withdrawals. But Scottish Equitable said yesterday that the cash buffer in the £2bn fund had fallen to just £80m following a wave of redemptions, giving it little choice but to suspend the fund. The only alternative was a "fire sale" of its holdings which could leave investors even worse off.
• Financial advisers continue to recommend that investors take their cash out of the funds that remain open. Jason Hemmings of Albannach Financial Management in Edinburgh said: "There are lots of rumours going about that other providers may be considering following Friends Provident and Aegon."
• The Aegon/Scottish Equitable property funds are managed by Morley Fund Management, which also runs the £4bn Norwich Union Property unit trust, the UK's biggest property fund. This week Norwich Union said the fund had fallen in value by a fifth over the year, but its cash buffer was at 6.4% after selling office blocks in London and Manchester worth £165m.
• Aegon UK added that it believes the "underlying fundamentals of the asset class remain healthy".