Institutional investors could cut their allocation to commercial property amid a leverage crisis faced by many UK pension funds in the wake of the recent sharp rise in interest rates.

Problems for pension funds, created by their exposure to liability-driven investments, came to the fore following former Prime Minister Liz Truss’ mini budget earlier this month.

Now these funds are looking to reduce their exposure to illiquid assets like property, Bloomberg reported.

PensionsEurope, a representative body for pension funds, said its members were reassessing their exposure to real estate and private equity, as illiquid assets like property aren’t of much use if assets must be sold quickly.

Earlier this month the Bank of England stepped into the UK government bond market, buying bonds to stop the price falling too low. It said it was doing so because if it didn’t, pension funds risked becoming insolvent, threatening UK financial stability.

Many funds had been buying bonds using derivatives as a complicated way of matching up the income from investment assets with the money they had to pay out to policyholders — a form of liability matching. When the price of these bonds dropped, the pension funds had to quickly put up cash to satisfy margin calls on the derivatives they had used to buy the bonds.

That led to a fire sale of any liquid assets.

Many of the funds tried to sell units in open-ended property funds, but these funds closed to redemptions so they could sell their underlying property assets over time.

Warnings about reducing allocations to real estate due to illiquidity come as the sector is already seeing a sharp drop in transaction volumes as interest rates rise, making it harder for investors to raise debt to buy assets and making property less attractive relative to other financial sectors.

The reversal comes after a decade of ever-increasing allocations to real estate from institutional investors, driven by a search for yield in a world in which interest rates were essentially zero, meaning buying bonds did not provide any income.