Redemption Delays Imposed at Friends Provident

Friends Provident have become the first property manager to impose a six month restriction on redemptions.

Tom Whitelaw 20 December, 2007 | 3:10PM
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Friends Provident have today imposed redemptions restrictions of up to six months on their £1.2bn internally managed property funds. Their decision comes at a time when investor confidence in the asset class is already at an all time low, and reflects the difficult position that many other property fund mangers find themselves in. The life and pensions provider is not the first company to take such drastic action, with M&G electing to impose a 90 day redemption notice (which they had previously waived) on the insitutional units of its offshore M&G Property Fund last month.

In a fa

irly frank announcement, Friends Provident state that “it will become necessary to sell underlying property investments in the fund”. This is something that Morningstar has warned of in previous articles on the subject as the worst case scenario for property managers (see our Property Showing Its Risks article). Forced sales are certainly problematic, especially considering the current state of the market. As other property market participants know funds are under pressure to sell, the ability of distressed sellers to command the best prices could well be constrained. Moreover, with credit markets tight, there is hardly a dearth of cheap money available to speculators wishing to take a chance on a quick turnaround.

Although it seems draconian, Friends Provident’s decision to impose the restrictions is a positive for long-term investors. The restrictions mean that property sales will not have to be completed immediately, and therefore there is a higher chance of a fair price being achieved for their assets. The flip side is that those who have a genuine need to pull money out of the fund at this point will have no alternative but to wait. That's one of the key risks in holding a fund that invests in illiquid assets, and its one that anyone selling such offerings should make abundantly clear.

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Tom Whitelaw  

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