Friends Provident blocks redemptions on property fund

21 December 2007

Investors in the Friends Provident property fund will now have to wait six months if they want to cash in their investment, following the insurer’s decision to freeze the £1.2 billion fund.

Friends Provident said it had been forced to take the decision as a result of “significant and sustained” withdrawals from the fund as investors lose their appetite for commercial property investments. During the three months from September to November monthly redemptions were averaging £25m a month, but in the four weeks to December 17th redemptions hit a whopping £58m.

Mark Dampier head of investment research at Hargreaves Lansdown said that without the restriction it would have been forced to sell off a portion of its underlying investments in order to pay off disgruntled investors. “Friends Provident had to be fair to its unit holders and prevent the force selling of properties which would have resulted in lower prices,” he explained.

As commercial property is not a particularly liquid investment – with holdings typically taking several months to sell – it’s important for commercial property funds to keep a cash buffer to cope with redemptions. But in recent months funds are finding that these cash reserves have come under increasing pressure. Jim Murdoch, spokesperson for Friends Provident said: “We would generally expect to have a cash buffer of around 10%, back in July it was around 14%, but now its come down to just 5%.”

The commercial property market has boomed in recent years, with a rush of new investors enjoying several years of double-digit returns. However, returns have dropped back substantially this year. According to data from TrustNet the average UK property fund is down almost 10% on the year to date, with Friends Provident down almost 12%, Norwich Property down 16.2% and New Star UK Property posting losses just shy of 20%.

The slump has been blamed on a number of factors. Yields on new property investments have dropped substantially as growth in property prices exceeds growth in rental incomes, while the ongoing credit crunch is making finance harder to secure.

So do investors need to panic? Property is a cyclical investment and as such experts are saying that long-term investors shouldn’t head for the door. Dampier says that so long as investors invested for the right reasons in the first place and don’t have too much exposure to the sector, the only reason to redeem is an urgent need for cash. “We’re not suggesting there’s going to be a crash, it’s just a revaluation. Returns in recent years have been very good and it’s almost that those have been borrowed from the future.”

Anna Bowes, investment manager at AWD Chase De Vere said the restrictions could actually be a blessing in disguise for worried investors: “Not letting investors get to their money could actually be a good thing. Now is not the time to be selling property.”

While returns are likely to be low in 2008, experts agree that they should eventully settle back to a long term average of between 6% and 8%. “Property is a good long term diversifier and the fundamentals remain,” added Bowes.

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