Beware funds that lock you in when prices fall

SAVERS fear their cash may be locked up as property funds close their doors. In a move reminiscent of the property crash of 2007 several major property funds have started to bar savers from escaping.

Property funds at Henderson, Standard Life and M&G have all invoked their right to charge investors to redeem their cash in a bid to stem outflows.

The move to so- called ‘ bid pricing’ means investors may be forced effectively to pay up to 5pc of their savings to access their cash, or could be blocked from getting it altogether.

Most property funds own bricks and mortar across the country, including retail parks, warehouses, offices and blocks of flats. As the value of the property increases, so does the fund.

On top of that investors are paid a juicy dividend from the rental income the fund receives from letting its buildings.

Unsurprisingly, as the property market has soared in recent years, so too has investor interest in these funds.

The sector has been among the best- sellers for some time, according to figures from trade body The Investment Association.

Because the funds’ money is tied up in property, managers tend to keep a cash buffer to allow for the regular inflows and outflows of investor money from the fund – it takes time and money to buy and sell buildings.

It is a system that works just fine until there is a run on the fund. If a flurry, investors all want to redeem their cash at the same time, the manager is forced to sell buildings to meet those redemptions, which means he has to sell quickly and probably at depressed prices.

If the number of redemptions appears to be gaining momentum some of these funds have a rule whereby they can start charging investors heading for the exit.

It is usually a temporary measure – although it can last several months – to put savers off taking their cash out unless they really need to. Not all funds are able to do this. Those which can are known as dual-priced funds.

Typically savers will lose around 5pc taking their cash out when the fund has moved to this type of pricing, which means for every £1,000 you withdraw you lose £50.

Others have a 5pc charge for buying the fund instead.

So what has caused firms to start putting up these barriers? Money is starting to come out of the funds. Many savers will be taking profits after a good run – some of these funds have doubled investors’ cash in only a few years. The Schroder Real Estate Investment Trust would have turned £10,000 into £21,690 in the past five years.

OTHERS may fear property prices are starting to reach their peak or may be concerned about what Brexit could mean for UK property values. If funds look to stop investors taking their cash that could cause more panic.

In 2007 and 2008 many property funds locked their doors because too many savers were taking their money out and the funds couldn’t sell their assets quickly enough to meet redemptions.

But Darius McDermott, director at Chelsea Financial Services, doesn’t think savers should be worried just yet. ‘ We think there is still some money to be made in the sector,’ he says.

He likes the Henderson UK Property fund, regardless of its pricing. It has returned 24.5pc over the past three years and yields 3.1pc. Among its properties are a Travelodge in London’s Kings Cross, a commercial park in Derby and a Windsor office park.

McDermott also likes M&G Property Porfolio, which yields almost 4pc. Its assets include a designer outlet mall in Wales, a retail park in Northampton and offices in the City of London.

A spokesman for Standard Life, which has put a 5.5pc charge in place, says: ‘It is our objective to prevent investors being disadvantaged by transaction costs associated with an increase in inflows or outflows.’

A spokesman for Henderson says: ‘ This is about being fair both to clients selling units and those who remain invested in the fund.’ An M&G spokesman says: ‘This decision is designed to ensure equitable treatment for clients selling units and those who remain invested.’