Budget sparks property fears

Fire sale prices possible as investors withdraw from UK's property funds

Investors withdrawing from property funds in the United Kingdom could trigger an asset fire sale in the sector following the ongoing market reaction to the government's mini-budget last month, analysts have warned.

Share prices in property companies tumbled in reaction to Chancellor of the Exchequer Kwasi Kwarteng's fiscal plan to cut taxes announced on Sept 23 that he heralded as "a new approach for a new era".

The Financial Times newspaper reported on Monday that more than 100 million pounds ($111 million) was withdrawn from property funds tracked by fund trading provider Calastone in the 10 days after Kwarteng's announcement. It said this was almost eight times the amount withdrawn over the previous three weeks.

The pound plunged to an all-time low against the dollar of $1.03 after the chancellor rattled investors and politicians by vowing to press on with more tax cuts following the announcement of the 45 billion pound tax cutting mini-budget. The pound has since recovered to $1.11, but remains at a 40-year low.

Investors are reported to be worried about what the dangerous mix of rising gilt yields, high interest rates and a falling pound will mean for both commercial and residential assets.

The FT reported that commercial property markets were already under strain from higher borrowing costs, and pressure was building as rapid withdrawals pose a problem for some property funds, which it said can take several months to offload properties in their portfolio.

One analyst told the newspaper that an increasing number of withdrawals "could force funds to jettison assets", dragging prices down further. "One way or another, those assets are going to have to be sold into a down market," Zac Gauge, head of European real estate strategy at UBS, said.

The Times newspaper reported on Monday that the Bank of England will escalate a bond-buying program launched two weeks ago to calm the turmoil in the debt market caused by the fiscal plans. The bank, which stepped in to bail out pension funds, could now double the size of daily purchases of gilts from a maximum of 5 billion to 10 billion pounds a day.

The Treasury announced on Monday that Kwarteng will set out his plan for balancing the government's finances on Oct 31, nearly a month ahead of the original date.

The fiscal statement is expected to detail how the chancellor intends to pay for the tax cuts and will explain how the Treasury intends to reduce debt in a move designed to cool markets spooked by the lack of details given so far, the BBC reported.

Kwarteng had refused to publish a draft report by the Office for Budget Responsibility to accompany the mini-budget on Sept 23, and originally insisted he would announce further details of fiscal plans no sooner than Nov 23.