Pension fund investors representing $420 million in Equitable's Prime Property Fund want to cash out, following word the fund will post a loss of 0.4% for 1995.
The loss is due primarily to its heavy shopping center concentration. The news foreshadows a year of expected writedowns for other real estate advisers that have a high percentage of shopping centers in their funds.
Pensions & Investments learned that Atlanta-based Equitable Real Estate Investment Management has been telling its Prime clients to expect a loss for the year.
Returns on private real estate are typically reported a quarter late.
A spokesman for Equitable Real Estate - the largest pension fund real estate adviser - confirmed investors representing $420 million have asked to cash out.
And, an official with a company that conducts secondary trading of commingled fund shares confirmed his company has been contacted by Prime Property Fund investors looking to sell.
"For the last nine months or so, SMART (Secondary Market Acquisition Realty Trust) has received few calls from investors seeking to exit Prime Property Fund," said Steve Gruber, vice president of Liquidity Financial Advisors Inc. "In the last week, we've received several calls."
Shopping centers, which comprise almost 55% of Prime Property, dropped almost 19% in value in 1995, according to Jonathan Miller, a spokesman for Equitable Real Estate. Overall, property values in the $2.9 billion fund dropped 9% in 1995; income for the fund was 8.6%.
But none of that income was paid out in cash, which might cause a new investor that wants to buy the units in a secondary transaction to bid at a discount to the fund's net asset value.
"We value Prime Property Fund based upon the income stream that the investment will provide," said Mr. Gruber. "The present value of this income stream should equal, approximately, the current value of the investment.
"Over the past several years it appears (Prime Property) has produced funds available for distribution that, on a net present value basis, do not equate to a price near reported net asset value."
Mr. Miller disputes SMART's analysis of Prime Property. "SMART is trying to take Prime Property Fund's annual report information and value the fund as if it were a REIT," said Mr. Miller. "That can't be done."
Strong performance of office and industrial properties in Prime Property insulated the fund against a steeper drop in values, according to Mr. Miller.
But other advisers with heavier concentrations or a retail focus may not be as fortunate.
According to the 1995 P&I Real Estate Directory, the managers with the heaviest allocations to shopping centers are: Corporate Property Investors, New York, a private real estate investment trust that has 92% of its $2.7 billion invested in retail; The O'Connor Group, New York, 68% of its investments in shopping centers; DRA Advisors Inc., New York, 60% of its assets in retail properties; and Schroder Real Estate Associates, New York, with 60% of its assets in retail properties.
The hit these managers will take on retail might be mitigated if they wrote down the value of their shopping centers in previous years.
John Emmanuel, senior vice president of Schroder, expects his mall portfolio will drop about 3% to 4% in value for 1995, but the total return of Fund A will be 4%, meaning income will be 7% or 8%. The four malls in the portfolio "had been written down over the last year," he said.
Executives at the other firms couldn't be reached for comment.