InvestmentMarket:The €400m Irish Commercial Property Fund at Friends First is the fourth fund to suspend redemptions recently, writes Gretchen Friemann.

Friends First has become the latest institution to impose a six-month ban on cash withdrawals from its Irish Commercial Property Fund as an investor exodus leaves it struggling to cope with rapidly falling liquidity levels.

The €400 million portfolio, comprising prime office, retail and industrial property, is the fourth to suspend redemptions in recent months, following closures from Hibernian, Standard Life and Irish Life.

The move means investors wishing to access more than €100,000 from the fund will be unable to do so for up to six months. Cash withdrawals for under that amount are still permitted but will now be subject to a 12.5 per cent exit penalty.

Friends First outlined the new restrictions in a letter circulated to brokers last week. In it the institution stated the "significant increase in the number of encashments or switches out of the Irish Commercial Property Fund in recent weeks" had "resulted in the cash reserves in the fund being significantly eroded".

The company claimed the measures were necessary to "protect the interests of investors remaining in the fund" and pointed out its competitors had already adopted similar restrictions. Friends First also sought to allay unit holders' fears about the sector's future performance, stressing in the letter that "Irish commercial property represents a good long term investment".

But, according to Eamon Porter of Aspire Wealth Management, an authorised adviser, many people sinking money into funds, such as that of Friends First, did so on the mistaken belief that it would be a good short-term investment. He says investors are "confusing property with equity and treating it as if it were a liquid asset".

He points out that an industry-wide ban on redemptions has occurred twice in the past 20 years and says there is "no worse place to be" for an investor "caught short on cash" than a unit linked property fund. "As soon as people take fright and start to demand their money back the institutions will slam the door and then you may be locked into depreciating assets without the ability to liquidate your investment".

But he says the difficult market also presents opportunities and suggests that investors in property for the long haul may now buy into the funds at bargain prices.

That may be just what the institutions want as the run on redemptions has severely depleted vital cash reserves, which normally stand at between 5-15 per cent of a portfolio's value. In Friends First's case its cash buffer on the Irish Commercial Property Fund - which includes prime retail outlets such as the Oasis shop on St Stephen's Green and the Laura Ashley unit on Grafton Street - is supposed to remain at €20.2 million.

However, the decision to freeze withdrawals and move the fund to a sales price basis - which knocks 12.5 per cent off the unit price as the institution factors in selling costs - indicates its liquidity levels are plummeting.

Many in the market are now questioning whether Friends First's move is part of a wider domino effect in the industry that will see more institutions restricting redemptions.

In the UK, the sudden panic among retail investors forced many funds into selling prime properties at a heavy discount; a scenario that Irish institutions are desperate to avoid.

However, Ann Hargaden, a director of investments at the Lisney agency, believes institutional firesales are "unlikely" and claims "values will simply stagnate" as institutions shun the market.

Yet while the Irish commercial property sector has so far avoided the price slumps afflicting parts of the UK, it is widely expected that capital values will depreciate to some extent.

For the past few years, the consultancy firm, Mercer, has advised pension funds to reduce their allocations in Irish property and diversify into the European market. A few years ago exposure to the sector ranged from 10-15 per cent. That is now down to an average of 8 per cent, according to Eamonn Liddy, an adviser at the global company. He says "pension funds have unwound their positions by stopping new contributions into the sector".

As the demand for redemption increases many small investors may be wishing they had followed suit earlier.

But Niall Gaffney, the new chief executive with IPUT, which manages one of the largest portfolios in the State, argues the near 20 per cent returns of the past decade were "extraordinary" and describes it as "unrealistic" for that growth rate to continue.

While he doesn't anticipate a price shock on the scale of the UK market, he cautions that "values must come back to reflect the new investor sentiment". He predicts returns will hover around 10 per cent over the next few years but argues "this still represents a solid investment by any yardstick".