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Fitch warns of contagion among property investment funds

Two Irish funds recently froze withdrawals for up to six months

Fitch: ‘If a fund experiences a spate of outflows, investors in other funds invested in similar assets may move fast to redeem their holdings to limit exposure to declining asset values after forced sales.’ Photograph: iStock

Problems that forced two Irish property investment funds to temporarily bar investors from withdrawing their cash could spread to other such companies, credit analysts warned on Wednesday.

Aviva Irish Property Fund and Friends First Irish Commercial Property Fund, which hold assets totalling €940 million, recently froze withdrawals for up to six months after they were unable to meet investors’ demands for the return of their cash.

Analysts at Fitch Ratings, which assesses businesses’ ability to meet their liabilities, say the problem could hit other funds if investors’ demand for European commercial property weakened.

“There is also the risk of contagion,” Fitch points out. “If a fund experiences a spate of outflows, investors in other funds invested in similar assets may move fast to redeem their holdings to limit exposure to declining asset values after forced sales.”

The credit ratings agency adds that “gating” or temporarily freezing withdrawals could worsen this contagion while potentially damaging the investment firm and the sector as a whole.

However, Fitch argues that the problem would be unlikely to spread to the broader financial system as commercial real estate funds account for only 2 per cent of the assets under management globally.

Property investment funds temporarily freeze withdrawals when investors’ demand for their money outstrips the companies’ ability to pay them.

Frozen

Fitch notes that funds such as those frozen in the Republic allow investors to withdraw cash on a daily basis, despite owning commercial properties that cannot be sold quickly or in large enough quantities, to meet significant demand for withdrawals.

At the same time, holding large quantities of cash would limit the fund managers’ abilities to meet investment return targets.

The agency suggests that regulations that would move funds to offer less frequent withdrawals could ease the problem.

The Irish funds that halted withdrawals were just the latest in Europe to find investors’ requests for cash exceeded their resources to pay them. The pair’s properties include the Royal Hibernian Way shopping mall in Dublin and the Globe Retail Park in Naas.

Insurer Aviva, which owns both funds, said recent net outflows prompted its decision to freeze all outgoing transactions.

The Irish Life Property Fund said it had no plans to freeze withdrawals as it had good levels of cash.

The firm told brokers that, in common with all such investment vehicles, it was prudent for it to reserve the right to temporarily bar withdrawals.

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