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Property crunched

• Robert Peston
• 21 Dec 07, 09:27 AM

There is a rush for the exit from funds invested in commercial property, as fears grow that bricks-and-mortar for commercial use will be one of the more serious casualties of the credit crunch.

The managers of property funds have reacted in different ways.

, the investment arm of , the leading bank, has this week reduced the unit price of investments in its life and pension property funds by a staggering 19%.

That represents a fall in the value of the 拢2bn odd in its property funds of about 拢380m.

Some investors fear that Clerical Medical has reduced the unit price more than is strictly necessary, in order to stem redemptions by worried investors.

But the magnitude of the collapse of confidence in commercial property is hard to exaggerate.

Another manifestation of the sector's woes was a six month freeze in withdrawals from a 拢1.2bn fund by .

Friends felt it had no choice, because too many investors in the fund have been demanding their money back and cash balances in the fund have fallen to worryingly low levels.

The flight from property is a pronounced trend. Friends is the first fund to prevent retail investors cashing in, but other fund managers, including and , have put a block on withdrawals by institutional clients.

Their behaviour is rational, if alarming.

Unless investors' demands for redemptions are stemmed, there would be forced sales of substantial properties. And such forced sales would precipitate a vicious, self-reinforcing downward spiral in property prices.

Most at risk are the tycoons who have borrowed substantial sums to acquire properties on their own account as the property bubble inflated in the last few years - and second in the queue for pain are the lenders to such tycoons.

For banks and other financial institutions, the next wave of losses after sub-prime is likely to come from direct and indirect lending to commercial property.

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