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Commercial breakdown?

At the start of the year, after having delivered double digit returns for the past three years, there was a growing consensus in the financial services industry that the commercial property sector was to take a hit.

The Royal Institution of Chartered Surveyors forecasted a market return in the region of 7-8 per cent, a figure that many fund firms were happy to agree.

Now as we hit the end of the year it seems that the slowdown has come to fruition but those funds that invest in property shares in addition to bricks and mortar have been whacked hard with this exacerbated by investors looking to rush out of the sector.

Following the investor stampede, a number of firms moved prices from offer to bid, effectively imposing an exit fee on the funds.

Scottish Widows Investment Partnership led the way by reverting to paying redemptions at the fund’s offer price rather than the bid price. More then followed.

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.

While some still have the bid offer in place, a number moved back to reflect a drop in outflows, but just as the situation began to die down M&G stoked up concerns once more when it announced that it has imposed a 90-day notice period for institutional investors looking to move out of its property last week.

M&G has been quick to calm any nerves, claiming the decision was based upon a number of factors such as some investors looking to diversify from the offshore fund, which was launched back in March 2004.

Whether it is harbinger of more things to come in 2008 remains to be seen, but with funds such as Norwich Union’s flagship property trust shrinking by almost 20 per cent over the past few months, the concerns are there.

With around £1bn withdrawn since June and only about half the amount (£200m approximately) since the spring coming in, the sector has had a rough ride of late to say the least.

Hargreaves Lansdown investment manager Ben Yearsley believes this is likely to continue into next year.

He says: “The market looks as though it is going to be flat and more income orientated. What really has hit the market is property shares, but with the credit crunch and a number of other external factors the problems have spread and inflows are likely to be along these lines for sometime going forwards.”


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