some unlisted property trusts are coming into the place of pain

There is a fair chance we will be seeing a bunch of freezes on redemptions amongst the Unlisted Property sector. In other words if you are in there, then take the yield but it is going to be the revaluations of some holdings that will lower the Unit price. Nasty taste in mouth for many when there is an Unfreezing and hence ability to get out, if original capital isn't returned. But that's in the future.

Good article below, sums up the issues at play. As with most, it is the recent investors at the top of the boom that will be hurt more.

http://business.smh.com.au/business/sus ... tml?page=3

Suspended to stop the liquid plunge
Annette Sampson
August 23, 2008

AXA's decision to list its Australian Property Fund has thrown a spotlight on the liquidity pressures facing unlisted property funds.

Liquidity - the ability to get in and out of investments when you want to - is never a big issue in bull markets when there's no shortage of money looking for a home. But introduce uncertainty - or worse, the prospect of potential losses - and liquidity can disappear faster than investments in subprime mortgages.

AXA this week decided to suspend withdrawals from its $1 billion unlisted Wholesale Australian Property Fund and the retail Australian Property Fund that invests into it. While the fund has 14 per cent of its assets in cash and listed property to meet withdrawal requests, it announced it was suspending withdrawals for six months, by which time the fund should be listed.

AXA Australia's chief investment officer, Mark Dutton, said liquidity pressures were a key reason. "We see challenges ahead for the property sector which could be detrimental to our unit holders," he said. "In particular, pressure on liquidity may force decisions in the short term which are against the long-term interests of the fund."

AXA follows a growing list of unlisted funds exposed to the property market that have suspended or limited redemptions. Centro suspended redemptions in some of its unlisted direct property funds in December and since then other fund managers have had either to stop paying redemptions once they have reached a pre-set limit, or redeem only a proportion of withdrawals requested.

If this all sounds vaguely familiar, you're showing your age. It was the 1987 sharemarket crash that convinced many investors that unlisted property funds were the bee's knees. Then, as now, listed property funds were hammered by the falling sharemarket while returns from unlisted funds were up.

But as we entered the recession we had to have in the early 1990s, the property market came off the boil. Investors felt they would rather not stick around for the inevitable losses and asked for their money back. Funds typically paid out redemptions in five or six days, despite that it would take much longer to sell the underlying properties if everyone wanted out. That meant investors who stayed were likely to bear a bigger share of the losses, putting pressure on not to be caught as the last man standing.

Inevitably, trusts were unable to cope with the rush for the doors and had to freeze redemptions. When the unlisted trusts eventually listed, many came on at big discounts. Fortunately, things don't look as grim this time around.

Unlike the early 1990s, our commercial property market is not oversupplied and vacancy rates and rental growth are still reasonable. This is putting a floor under property valuations, though all bets are off if the economy takes a significant turn for the worse. More importantly, unlisted property funds are no longer subject to the insane regulatory requirement to guarantee to buy back units from investors within 60 days. This requirement, which was ditched after the 1991 crisis, provided a classic lesson in what happens when you promise short-term liquidity in a long-term investment. It doesn't work. But in the good times, some investors have forgotten that.

Since the 1990s the unlisted property market has evolved in two directions. Closed-ended property funds or syndicates took the liquidity thing to heart. They were set up for a fixed period (typically six, seven years or more) with no withdrawal rights for investors. More recently, open-ended funds more like the old unlisted trusts have regained popularity. A Property Investment Research associate director, Dugald Higgins, says they offered greater liquidity, but often capped redemptions at about 5 per cent of the fund's value each year. Where that limit has been reached, some have stopped paying further redemptions (a case of "first in, first served") or paid everyone who applied a percentage of what they wanted.

That means many unit holders are locked into investments with an uncertain outlook. Many unlisted property funds are still showing strong returns, but there are fears of a lag effect as properties are revalued to reflect new market conditions.

Higgins says at any point, only about a third of a fund's valuations are current. If properties being revalued now were last revalued two or three years ago, chances are the results will look good - thanks to strong prices increases over recent years. But properties bought at low yields more recently may be losing value - though this may not yet be reflected in unit prices.

Higgins says the debt crisis and rising interest rates are also turning the screw for property funds. He says many unlisted funds have gearing ratios of 50 to 60 per cent. To attract investors, they have been paying yields as high as 8 or 9 per cent.

As borrowing costs go up, it will be harder to sustain those yields - especially for funds that were already boosting their yield by borrowing more at low rates and using that to top up their distributions. In some cases, where properties were bought at bullish prices, the funds may be close to breaching their loan covenants, pressuring them to sell assets, possibly at a loss.

Higgins says many closed-end funds and syndicates are also nearing maturity. Property Investment Research estimates syndicates with total portfolio values of $1.5 billion are due to mature this year, increasing to $2.5 billion in 2010. Because their borrowings will mature at the same time, and it will cost more to roll over those borrowings, he expects many to sell the properties and wind up the syndicates when they mature - putting further pressure on property valuations.

AXA's fund is unusual in that it is ungeared and holds 25 properties with a 99 per cent occupancy rate and an average lease expiry of 4.6 years, which underpins its distributions. The fund manager is clearly hoping it will do well on listing, presenting an old-fashioned pure property investment. If the market outlook doesn't improve, others are likely to follow, if only to meet investor demands for liquidity.

So far, unlisted property funds are faring better than property-related debt investments such as mortgage funds and debentures. But investors are increasingly being reminded property is a long-term investment where short-term liquidity is not guaranteed. For some, that lesson will hurt.

END

Not much changed since posting that above.

Most still frozen, the heavily indebted (more than 40%) trimming distributions, the excessively indebted freezing distributions to stave off being in breach of loan conditions, and losing the plot completely (and investors money)

Commercial / retail/ office/ industrial sales have ground to a halt; only transactions are distressed ones. And the opportunistic snapping up the bankrupt. Which isn't good for valuations because the only way to go in this department is DOWN.

Only solution for the viable trusts is to hang on. If maturity was a possibility, and most unlisted trusts had been set up for a finite period of time, usually 5-8-10 years, after which they would be would up, then any possibility for such an occurrence must be diminishing and increasingly remote. Not much chance of cashing out, profitably, until the cycle gets going again, and that is way out, far in the future, an unspecifiable timeframe.