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Commercial break

Chris Salih reports on the aftermath of the furore caused by commercial property funds reacting to big outflows by bringing in redemption charges.

Investors in commercial property funds and their advisers have had a nervy past couple of weeks as investment firms have tried to stem outflows by effectively imposing an exit fee.

But following an outcry, Scottish Widows Investment Partnership has led the way by reverting to paying redemptions at the fund’s offer price rather than the bid price. Several more are expected to follow.

The problems began after Standard Life sent a note to advisers telling them that outflows were exceeding inflows and it was repricing five of its life and pension property funds, meaning any investor selling out would effectively take a 6.7 per cent hit on the unit price.

Norwich Union, Prudential, M&G, Swip, Resolution and New Star quickly followed suit imposing bid/offer spreads on redemptions ranging between 2 per cent and 6.7 per cent.

New Star spokesman Ben Robinson says the firm moved to a bid price after experiencing net outflows for two consecutive days, although he stressed that inflows remained strong and the company only expected the measure to be short term.

Standard Life spokesman Peter Timberlake says: “We have some liquidity in these funds but it was a case of treating customers fairly by ensuring we protected the interest of the long-term investors in the fund whose investment was decreasing through these redemptions.”

Property funds attracted a record £1.1bn of retail money in the fourth quarter of last year alone and the two biggest funds affected, Norwich Union and New Star property trusts, have almost £7bn in assets between them.

Many industry commentators believe the recent ripple was caused by a chunk of discretionary money being moved out of property in an asset allocation shift.

However, most of the leading investment advisers have been broadly supportive of the fund firms and accept that after such a phenomenal run of over three years of double-digit returns – way above the asset class’s historical average returnsome investors would look to take profits.

BestInvest head of communications Justin Modray says: “What these property firms are essentially doing is protecting their long-term investors. If they had to sell property then everyone would suffer. It is important to remember that these fund group do not benefit from the redemption fee, the long-term investors do.”

AWD Chase De Vere investment director Justine Fearns says she encouraged clients not to stampede to sell. She says: “When inflows are strong, the margin between the bid, or selling price and offer, or buying price for units in any property fund is narrow. If outflows are strong, then bid prices may be reduced to safeguard investors still in the fund.

“Kneejerk reactions are often regretted. Property funds have been the country’s best-sellers for almost a year and a half. Recent investors need to stay with it for the long term, not jump in and out.”

But one adviser says the redemption value of an investment he made into a Standard Life property fund fell by £7,500 the day after he made the transfer. The adviser, who does not want to be named, believes the fund firms should have given more warning about any impending problems and called for greater clarity around fund pricing.

The problem has been exacerbated by the nature of the asset class which is illiquid, with high stamp duty costs if managers have to sell assets to meet outflows.

Dennehy Weller & Co managing director Brian Dennehy notes that firms’ flexibility to adjust pricing is documented in the scheme particulars but the bid/offer spread on property tends to be much higher than on any other.

He says: “This sort of adj-ustment is fairly common but it hardly gets noticed on equ-ity funds as the costs of buy-ing and selling the under-lying assets are not great.”

One positive outcome could be a reality check that will dampen expectations about the asset class to a more sustainable level.

Consensus is building that returns are likely to revert closer to the historical average of high singledigit returns.

Chartwell chief investment officer Craig Wetton says: “There are still very good returns to be had in property and investors should consider what they want from their investment income, growth, or both.”

Paradigm Norton senior financial planner Carlton Crabbe says: “Commercial property is a helpful diversifier over the long term but many investors are coming to the party late with the hope and expectation of continuing high returns. Unfortunately, since the beginning of the year, returns on some of the UK’s most popular funds have either been flat or delivered a negative return.”


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