The crisis reached new levels this week, when Santander sought to freeze payouts from its main real estate fund after Spanish investors tried to withdraw 80 per cent of the capital.
The problem boils down to liquidity - or the lack of it. Funds trying to sell assets to meet redemption payouts have found there are few buyers in today's depressed property investment markets. Caught in a vicious circle, property values continue to lurch downwards, the funds' portfolios suffer further knocks and more investors scramble for the exit. For this very reason, the Investors Chronicle of "so-called open-ended property funds" as far back as November 2007.
Ignoring the current stampede for the exits, it is tempting to believe that buying into property funds at the bottom of the cycle could offer a half-decent return in the future - after all, property offers a long-term income stream, and capital values should eventually correct upwards. Certainly, some independent financial advisers have already started murmuring about getting in cheaply.
But investors need to be aware of several pitfalls, starting with the questionable quality of property assets these funds bought on the way up, when they were desperate to find a home for the cash flooding into their coffers.
"There's more real estate to be bought than there are buyers to buy it," says Chris Turner, fund manager of the listed TR Property Investment Trust. "Looking through some of the portfolios we've been offered [by property funds], you wonder how on earth they ever came by them. But money was piling through the door."
In today's market, funds will only be able to dispose of their best assets, leaving investors with the worst of a bad bunch of property assets. And overall performance in 2009 will be further compounded by the impact of falling rents and growing voids from tenant failure.
