Aegon Scottish slams door on property fund withdrawals

Investors in property funds are bracing themselves for a "lock-in" of their cash after Aegon Scottish Equitable said it had been forced to stop withdrawals from its £2bn fund following a rush to sell.

Market sources said yesterday that Scottish Widows is poised to announce a similar moratorium on its £2bn funds, with a spokesman saying last night: "As it stands today we have not made any changes."

Both Scottish funds are restricted to life and pensions policyholders, as is the £1.2bn Friends Provident fund which became the first to sound the alarm signal when last month it announced a six-month deferment on withdrawals.

Standard Life said yesterday it had "sufficient liquidity" in its £3.2bn fund and added that there were "no queues" to exit. It is, however, among a raft of managers including Prudential, Axa and New Star that are already imposing penalties of between 2% and 7% on those taking out their money.

Aegon's is the biggest fund yet to impose restrictions, and it means most of its 129,000 small investors will be unable to access their money for up to a year.

Spokeswoman Lesley McPherson said: "All we are doing is introducing a time delay for certain types of withdrawals. It is business as usual for people cashing in policies because they are close to retirement or taking regular income from their policy."

However, the insurer, which is taking its property fund management back in-house next month from rival Morley, where it has been outsourced, said the cash buffer in the £2bn fund had fallen to just £80m, far below its expected level of at least £200m. The fund is invested mainly in commercial property in the London area, and the only alternative to suspending withdrawals was a forced sale of offices and other developments into a weak market, damaging the fund.

Aegon blamed a "significant level of customer withdrawals" amid "worldwide phenomena relating to concerns over the US sub-prime mortgage market fall-out, rising interest rates and talk of recession". It said the "underlying fundamentals of the asset class remain healthy".

Norwich Union said earlier this month that the cash buffer in its £2.8bn property trust was at 6.4% after selling office blocks in London and Manchester at a slight discount to their advertised price. The NU fund is also managed by Morley.

Commercial property lost around 9% of its capital value last year as years of heady rises came to an abrupt end with the credit crunch, and traders are betting on a 16% decline this year. Property sector shares have been hammered over the past year, with British Land down 45%, Land Securities 34% lower and, at the other end of the scale, Glasgow's AIM-listed Terrace Hill seeing its shares halve in recent months.

Meanwhile, small investors poured £5bn into property unit trusts during the later stages of the boom in 2006 and early 2007 - since when most funds are showing falls of between 20% and 40%.

Aegon's decision came a day after data showed total returns from UK pooled property funds had hit their lowest level for 17 years in the last quarter of 2007, down 9.1% over three months and 6.7% for the year.

Patrick Connolly, financial planner at fee-based private client advisers Towry Law, commented: "The problem with investors is many people jump in at the top of the cycle, when performance has already been achieved, then wonder why it heads in the opposite direction.The restrictions in place in these funds protect long-term investors at the expense of those trying to exit, a lot of whom have come into the market more recently."

Aegon's Mark Locke stressed: "We are doing the prudent thing. We are protecting holders who do want to remain invested. It is not always smart to sell when the markets are down."

Norwich Union, Morley Fund Management and M&G said yesterday their property funds had sufficient liquidity and they had no immediate plans to extend restrictions. New Star, whose shares crashed yesterday on news of £500m of recent outflows across the business, said it had more than 20% cash reserves in its much-advertised property fund to meet requests for exits, which it said had "slowed significantly since Christmas".