In September 2004 one of the UK’s top-five life insurers assured
investors that commercial property funds carry “only slightly
higher risk than bonds.”
Just over two years later the doors of many commercial property
funds were being slammed shut, some for up to 12 month – following
an avalanche of withdrawals. Assets investors totalling over
£7 billion ($10.7 billion) of some 400,000 were impacted by the
initial freeze on withdrawals.
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Among insurers that imposed restrictions were Axa which in
January 2008 imposed a six-month waiting period from the date a
request for a withdrawal is received for redemption or transfer.
Axa’s UK Retail Life and Pensions Property funds with total assets
of £2.1 billion were affected.
Also in January, Scottish Equitable, a UK unit of Netherlands
insurer Aegon, announced even tougher restrictions, imposing a
deferral period of up to 12 months on the 130,000 investors in its
£2 billion property fund.
Though some insurers have eased their restrictions damage to
commercial property funds as a product have been severe. And the
situation could deteriorate even more, indicates a forecast by the
Royal Institution of Chartered Surveyors (RICS) published on 8
December.
“We are only half way through the price correction in the
commercial property market with values set to fall through 2009 and
2010 as rental declines gather pace,” said RICS senior economist
Oliver Gilmartin.
Commercial property capital values have already fallen by 25
percent according to RICS which anticipates further falls of “at
least” 16 percent in 2009 and 10 percent in 2010. RICS anticipates
price declines will be exaggerated by falling rents and an increase
in distressed selling as refinancing pressures take their toll and
that the cumulative downturn in prices will exceed the downturns
experienced in both the 1970’s and 1990s.
The office sector, which for some eight years has depended
heavily on demand from the insurance, banking and finance sectors,
is expected to be hit hardest with a forecast 16 percent decline in
rents in 2009, 11 percent in 2010 and six percent in 2011.
In total, RICS predicts that capital values in the office sector
will drop a further 30 percent to 35 percent bringing peak to
trough declines in excess of 60 percent.
Property fund investment woes are, however, not confined to the
UK. In late-October three of major players in Australia’s property
fund sector announced deferments of up to six months on
withdrawals.
In terms of size the most notable of all moves in the troubled
property market came in early November when 11 German property
funds with assets totalling some €30 billion ($38.7 billion)
announced three- to six-month bans on withdrawals.
