The planned sale of Citigroup's real estate asset management arm has hit a snag after some of the unit's clients refused to give their blessing to a disposal, sources told Reuters.

The U.S. government owns over a quarter of Citi after bailing it out during the credit crunch, and the firm is in the process of shedding a massive $547 billion of assets, or about a third of its balance sheet.

The bank, which put Citi Property Investors (CPI) on the market in June, is fighting to quell a last-minute backlash from several investor clients, who fear big cuts in the manpower controlling CPI's $12.5 billion portfolio.

(The investors) are ill-at-ease because they are concerned about a meltdown in the team. Everyone is unhappy about that, one source familiar with the situation said.

They feel that they are paying Citi to sell the business as opposed to looking for new deals, the source added.

Citigroup declined to comment.

Citi is keen to announce a preferred bidder for CPI as early as this week, the source said. But the client unrest could delay those plans, and may even force Citi to consider a temporary suspension of the sale process.

The investors may have no formal powers to block a sale, but an exodus would hurt the value of the business and make it less attractive for any buyer.

Leon Black's Apollo Management and Australia's Macquarie Group have been widely tipped as frontrunners to land CPI, which counts the State of New York, the Los Angeles City Employees' Retirement System and the State of Qatar among its investors.

However, on Friday, the Australian bank announced it had sold out of most of its Australian real estate funds business for $265 million as part of a strategy to refocus on traditional investment banking and broking, leaving Apollo the more likely suitor.

Apollo could not be reached for comment.

RATIONALE

Some investors were questioning the rationale behind the management overhaul at such a sensitive point in the global property market, a second market source said.

Many billions of dollars of the $1.4 trillion outstanding debt to U.S. commercial real estate falls due for refinancing this year and next, potentially triggering colossal firesales that could flatten the fragile economy.

Other investors are seeking clarity on Citi's reasons for offloading the unit amid rumors the preferred bidder is unlikely to pay more than a nominal sum for the business, a source familiar with the situation said.

I think it started out as something where they thought they were going to get a lot of money from a sale, the source said.

We are dealing with an opportunity fund and it's going to be as things are in these situations where you have the smell of a desperate seller, the source added.

Some market observers say stalling the sale could allow Citi, which is majority-owned by the U.S. Government, to achieve a higher price for CPI at a later date, when investor demand rebounds and the market puts a greater value on specialist real estate management skills.

Last July, Citi Alternative Investments transferred control of its global real estate securities team and its $450 million investment portfolio to privately-owned property fund manager Forum Partners as part of the bank's broader restructuring plan.

(Editing by Simon Jessop)

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