The headline reads Panic selling shuts £2bn fund. My comments are interspersed and each comment is exactly one paragraph long.
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.
My Comment: Panic? This was rational thinking. It took irrational thinking and herd behavior to invest in these funds in the first place.
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.
My Comment: What then? What happens is a year if (when) investors still want out and property values are even lower than now, which they likely will be.
It said the fund, invested in London office blocks and shopping centres across Britain, no longer had sufficient cash reserves to meet demands from investors wanting to withdraw their money. Its “buffer fund” was down to 1% of its total assets, instead of the usual 10-15%.
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.
My Comment: Commercial property values are going to continue to dive.
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. The insurer said last night: “We are looking at all the options, but no decisions have been taken.”
My Comment: There is only one rational option. Sell, now before Scottish Equitable decides to sell. Panic early before the herd and salvage what you can.
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”.
My Comment: When Bear Stearns closed two hedge funds it was done to “protect investors”. Three months later, the hedge funds went to zero. Losses will be steep.
The Financial Services Authority said it was closely monitoring the situation and had been informed by Aegon of the decision to halt withdrawals.
My Comment: What good does “closely monitoring the situation” do anyone?
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.
My Comment: The crisis in commercial real estate has barely started.
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.
My Comment: Pension funds are going to take a huge hit on both sides of the Atlantic. I doubt any losses have been marked to market. Pension funds have no business investing in such extremely illiquid assets.
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.
My Comment: Some are trapped in hedge funds, some are trapped in property funds, and some are Trapped In Suburbia.
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.
My Comment: Scottish Equitable is committed to the path of following the market down, which will do nothing but cause pent-up withdrawal requests. Ask Bear Stearns how that worked for them.
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.”
My Comment: That is rock solid advice. Anyone in a property fund should get while they still can (if they still can).
Aegon UK added that it believes the “underlying fundamentals of the asset class remain healthy”.
My Comment: The underlying fundamentals for overbought, overloved, commercial property in the face of a consumer recession has never been worse.
U.K. Residential Prices Sink
Bloomberg is reporting reviving buyer interest as U.K. Home Prices Fall a Third Month.
U.K. house prices declined for a third month in January, reviving interest among prospective buyers after a slump in viewings late last year, Rightmove Plc said.
“Enough sellers seem to have dropped their prices to encourage potential buyers to look in larger numbers, suggesting we might see a more active market at this lower price level,” said Miles Shipside, commercial director of Rightmove, in a statement.
“Now is a good time for bargain hunters to press those committed winter sellers for a deal.”
This is of course complete silliness. Property bubbles do not correct in 3 months or even 3 years. Anyone that needs proof can look on this side of the Atlantic. Now is a horrid time to be buying real estate in any bubble area and that includes the U.K.
Mike “Mish” Shedlock
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