KEY POINTS:
Collapsing investor sentiment, which yesterday prompted financial services giant AMP to freeze withdrawals from a $419 million property fund, now poses a threat to New Zealand's financial stability, says Goldman Sachs JBWere.
AMP Capital New Zealand said it had suspended redemptions and would not accept new applications for its unlisted Capital NZ Property Fund, with the move being taken "in the best long-term interests of investors".
The fund invests in well-known, high-quality commercial, retail and industrial properties. Its returns to investors come from growth in the value of its units; it does not pay interest or any other distributions.
AMP Capital managing director Murray Gribben said the action was taken "as a prudent response to the current extraordinary market conditions" where investors were looking to reduce their exposure to property investments.
That had resulted in higher-than-usual redemptions from the fund without sufficient offsetting inward flow of new investments.
"We believe we are acting in the best interests of investors by temporarily suspending activity to preserve the quality of the fund," said Gribben.
The fund was a long-term property investor and its assets were not immediately realisable.
"These types of provisions are common to these types of funds to ensure that the interests of investors are protected during periods of market volatility."
The fund's trust deed allows it to suspend redemptions for up to a year but Gribben said it was hoped to reopen when conditions allowed.
The fund has 2900 direct retail investors although many more are exposed via other diversified investment funds and Gribben said increase in redemption requests had primarily come from direct retail investors.
It has been a strong performer, even in recent months, with capital growth of 11 per cent in the six months to June, and 17.7 per cent in the 12 months to June.
AMP's move comes a few days after the "flight to quality" out of property-focused finance companies - which has sparked a fresh series of defaults - appeared to have spread to mortgage funds, with three holding more than $550 million in investors' funds halting redemptions in little more than a week.
Investment industry researchers Fundsource this week estimated investors had pulled close to $300 million out of mortgage trusts and property funds during the last quarter alone.
Goldman Sachs JBWere economist Shamubeel Eaqub noted Thursday's news and ensuing negativity could result in "buying opportunities for quality listed property trusts which offer generally defensive earning streams, attractive yields and conservative growth prospects".
However AMP's move had more serious implications.
"There is now increasing evidence of a loss of confidence in manyfinancial instruments. We believe the RBNZ must seriously consider the potential flow on impacts of such a loss of confidence, if magnified, on financial stability."
Massey University property studies director Bob Hargreaves said the fact that AMP, which "always had a sound and conservative reputation", had been caught up in an ongoing flight to cash showed how far investor sentiment had soured. It was an example of the "herd instinct" often seen in investment markets.
FUND FREEZE
AMP Capital NZ Property Fund
* Investments worth $419m.
* 2900 retail investors.
* Has stakes in properties including the Lion Nathan brewery site in Auckland, Bowen House in Wellington and The Palms shopping centre in Christchurch.
