U.K. Property Crunch
Grows Deeper

LONDON -- Investors are looking to cash out of some high-profile commercial-property funds in what appears to be the latest sign of U.K. investor caution tied to the global credit crisis.

Dutch insurer Aegon NV became the latest firm to freeze withdrawals from its U.K. commercial-property fund by a rush of investors looking to cash out because commercial real-estate values are falling. Scottish Equitable, Aegon's U.K. unit, said investors wishing to cash in policies or transfer out of its $3.9 billion fund will have to wait as long as a year. Typically the fund has allowed its 129,000 small investors to cash out whenever they wanted their money.

The move follows similar actions taken by Friends Provident PLC, a U.K. life-insurance and pension provider, and U.K. asset manager Morley Fund Management. Friends imposed a six-month restriction on redemptions; Morley said it wouldn't honor such requests for one year.

In addition, New Star Asset Management Group said Friday it expects 2008 operating profit to drop significantly from 2007 as investors continue to pull assets. The fund, which has a large number of individual investors compared with many of its peers, is vulnerable to changes in market sentiment.

So far, rushes on redemptions are being felt primarily by funds in the U.K. That is because most funds there are set up as open-ended funds -- often targeting small investors and typically letting them redeem their shares anytime.

In contrast, no significant customer withdrawals have been reported in the U.S. partly because most real-estate funds there are structured as limited partnerships for institutional investors. They are more restrictive about when investors can redeem their funds.

Technically, U.K. property-fund managers can limit redemptions, but until recently they have been flexible. Now, they are adhering rigidly to restrictions they are allowed to impose.

Commercial-property values are falling world-wide, largely because of the credit crunch. While most office buildings, shopping centers and other commercial property are still throwing off a healthy cash flow, they are worth less to investors because financing costs have risen. Meantime, sales activity has slowed to a crawl because it is more difficult for buyers to obtain credit. That has made it hard for fund managers to sell properties to meet redemption requests.

Aegon's decision came a day after data showed total returns from U.K. pooled-property funds hit their lowest level in 17 years during the three months ended Dec. 31. U.K. pooled-property funds delivered total returns of minus-9.1% for the quarter and minus-6.7% for 2007. This reflects the performance of the direct-property market, which saw 12-month total returns sink to minus-5.5% in December, marking the worst annual total return since 1990.

Aegon's freeze will protect it from having to sell property assets below market value to meet redemptions as long as the restrictions are in place. This action enables Aegon U.K. "to manage the funds in the interests of both long-term investors and those who wish to exit the fund," the company said.

The halting of redemptions was a forerunner of a likely trend this year toward lower asset-management fees and profits as funds under management drift down on revaluations and probable net redemptions, analysts said. But analysts said the redemption limitations shouldn't have a direct impact on the earnings of Aegon or of Friends Provident.

--Lingling Wei contributed to this article.

Email your comments to rjeditor@dowjones.com.