Worries Grow On Mortgage Funds

The Age

Saturday October 25, 2008

Eric Johnston and Eli Greenblat

FEARS are growing the crisis in the nation's $12 billion mortgage fund sector could soon spill into the broader property market, with developers and home buyers at risk of having a key funding tap shut off.

The Federal Government last night brought forward modifications to the deposit guarantee scheme including a $1million cap on funds protected under the program to reverse the withdrawal of funds by skittish investors from mortgage trusts into banks.

The $168 million Mariner Mortgage Trust yesterday became the latest fund to freeze redemptions amid concerns that withdrawals were spreading beyond mortgage trusts, with funds now draining from other investments such as cash management trusts not protected by the Federal Government's guarantee on deposits.

But Treasurer Wayne Swan last night said banks would now be charged a risk-based insurance premium on deposits over $1 million in a move expected to drive down interest rates on term deposits.

Bank executives, including National Australia Bank's John Stewart and ANZ's Mike Smith, have argued the insurance system would be enough to maintain confidence in the system while slowing the redemptions from investment-style funds.

However, fund management executives warned it could now take years to rebuild confidence among the mortgage industry funds, which have been caught out by the sudden drain on liquidity.

Perpetual, Axa Asia Pacific and Australian Unity this week froze redemptions across $5.4billion of savings in mortgage funds to prevent a rush on withdrawals, a move that mostly affects retirees and small investors.

Since the deposit guarantee program was announced, billions of dollars have flowed out of mortgage funds, mostly into high-yielding term deposits that the Federal Government guarantees.

Analysts said liquidity-starved mortgage funds were likely to switch to a conservative strategy, potentially switching to cash-based investments until the worst of the credit crisis had passed.

"Investors in the property sector will now struggle to roll over their loans," said Lonsec head of research Grant Kennaway.

Fund executives fear the lockdown on the mortgage funds will damage the reputation of the large managers, which oversee tens of billions of dollars of retirement savings.

The last major run of mortgage funds was in the early 1990s, leading to the collapse of Estate Mortgage and OST Friendly Society.

"Often people associate closing redemptions with poor names or poor brands, but in the current environment some of the best and prime brands are doing it," a fund executive aid. "Soon people are going to ask questions about funds in other products."

After Perpetual this week wrote to investors advising of the suspension of redemptions from its mortgage fund, financial planners reported calls being fielded about other Perpetual-backed investments.

At the same time shares in Perpetual, one of the nation's biggest independent fund managers, with $37 billion under management, slumped 6.8% to $43 yesterday.

Meanwhile, National Australia Bank's wealth management business, MLC, yesterday tried to distance itself from the mortgage crisis, telling customers that none of its funds had been frozen.

"NAB's wealth management business, MLC, is performing well in a very difficult environment," said NAB executive director Ahmed Fahour. "Customers should have comfort that their investments are both safe and being managed prudently." The crisis was mirrored by a similar run on confidence in the listed space. Fittingly, it was the nation's biggest and oldest listed property trust, GPT Group, that pressed the panic button when it announced on Thursday it would try to raise up to $1.9 billion to repair its bleeding balance sheet, stave off its bankers and sell its assets.

GPT shares were placed in a trading halt and investors looked to punish other trusts. Shares in ING Industrial Fund - which is backed by mammoth European bank ING - fell nearly 50% yesterday morning. Its shares are down 75% for the year.

Adding to the contagion, Becton Property Group called a trading halt in the lead-up to what is expected to be a major restructure or privatisation. Goodman Group, once a mighty satellite of the Macquarie Bank empire, was also placed in a trading halt, its shares down 80% for the year-to-date.

Australian Unity Investments head of property, Martin Hession, a 30-year veteran of the industry, is stunned by the market's savage reaction to the Federal Government's guarantee on bank deposits.

"I've never seen anything like this, nothing near it," he said.

Australian Unity also amended its redemption process to stem the flow of funds as skittish investors flock to safety.

Despite the withdrawals, Mr Kennaway said the mortgage funds were still delivering a solid income stream.

"The underlying assets of the funds are fine, it's just the risk-return profile has changed," he said.

"The risks have stayed the same but competing products offering similar returns have a Government guarantee."

Australian Unity introduced a quarterly capped redemption process while Perpetual yesterday told clients it intended to allow quarterly redemptions, subject to liquidity.

Meanwhile, AXA placed a freeze on fund withdrawals for up to six months. Mr Hession said that retail investors could ultimately lose out by stuffing cash into bank vaults, and that confidence in the beaten-up property sector would return.

"Once people start putting all their money into bank accounts the interest rates paid on those accounts will have to fall. The bank probably doesn't need all that money," he said.

Mr Hession said the crisis was different to the economic downturn in 1991 when a recession combined with high interest rates reduced the value of property as vacancy rates shot up.

"The things that are different from any previous period is we have very low vacancies in virtually all types of property, good strong rental growth - although that rental growth is declining, but still positive - there is no oversupply looming because people can't start new projects because there is no money to fund them," he said.

Indeed, recent macro-economic conditions could actually boost the property market, although funding of new developments and commercial projects would be constrained by the credit crunch.

The Australian Financial Markets Association, which represents investment banks and other money market firms, last night welcomed the Government's changes, saying credit would continue to flow to Australian business.

"The guarantee treats bank deposits and money market securities in an even-handed way that removes the disincentive for investors to participate in the short-term money market," said AFMA executive director Duncan Fairweather.

© 2008 The Age

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