Investors Fear More Property Fund Casualties After Aviva Closure -- Financial News
May 20 2021 - 11:22AM
Dow Jones News
By David Ricketts
Of Financial News
Aviva Investors' decision to shutter its U.K. Property fund
could be the first of many permanent closures, as the real estate
sector continues to struggle with the long-term impact of the
Covid-19 pandemic and a looming overhaul of daily liquidity
requirements.
Aviva announced on Wednesday that it would permanently close its
367 million pound ($518 million) U.K. Property fund, saying it had
become "increasingly challenging" to generate positive returns
while also providing liquidity to investors wanting to cash out
when it re-opened.
The fund, which had 23% of its assets in cash and delivered a
return of -11.9% over the year to the end of March, was one of only
two property vehicles that hadn't resumed dealing after suspensions
were imposed last year due to the onset of the pandemic.
U.K. property funds were frozen in March 2020 after it become
difficult to obtain accurate valuations on assets such as hotels,
shops, offices and restaurants as national lockdowns were
imposed.
Oli Creasey, property research analyst at Quilter Cheviot, said
the Aviva fund is "the first real casualty" of the pandemic.
However, it is "possibly not the last," he added.
The majority of property funds have resumed dealing in recent
months, including the U.K.'s largest, managed by Legal &
General Group PLC, which oversees GBP2.2 billion. M&G PLC's
property fund, which manages GBP2 billion and suspended in December
2019, resumed dealing last month.
Larger property funds, said Mr. Creasey, are "at much less risk
of permanent closure."
"The Aviva news, however, could cause investors to lose
confidence in the sector and seek to withdraw money, and as such
some may be thinking their funds [have] become too small to justify
operating," said Mr. Creasey.
Property funds managed by Aegon NV and BMO Commercial Property
Trust Ltd. are among the industry's smallest, managing GBP393
million and GBP315 million respectively.
The Aviva fund closure comes after U.K. property funds recorded
their worst ever monthly outflows.
In March, investors pulled GBP589 million from U.K. real estate
funds, much higher than the GBP391 million pulled out in December
2018 amid growing uncertainty over the U.K.'s departure from the
European Union.
Jason Hollands, managing director at U.K. wealth manager Tilney,
said the commercial property market faces a "very challenging and
uncertainty outlook," as hospitality venues close and employers
look to downsize offices to cater for new hybrid working
patterns.
"Investor demand for commercial property funds is likely to
remain low for the foreseeable future and the open ended, daily
deal property fund model is under pressure," said Mr. Hollands.
"Aviva may prove a one off, but there might be others that
follow suit."
Property funds have bolstered their cash positions to deal with
potential investor withdrawals, with M&G's fund now holding 31%
of assets in cash.
U.K. property funds are also facing a potential overhaul to
their liquidity requirements. The Financial Conduct Authority put
forward proposals last year that investors in property funds should
have to give between 90 and 180 days' notice when they want to
withdraw their money.
Earlier this month the, regulator said it wouldn't make a final
decision on property funds until the third quarter at the earliest,
so that it can consider feedback from a separate consultation on
creating a new "long term asset fund" vehicle for the wider
market.
Kyle Caldwell, collective specialist at Interactive Investor,
the online investment platform, said: "The shortcomings of
open-ended funds when it comes to investing in illiquid assets is
no secret--and this closure is unlikely to be the last.
"While investment trusts are a better, if imperfect solution to
the liquidity issue, the regulator doggedly still looks for
workarounds that will use the open-ended structure. The jury is
likely to remain out."
Posting on LinkedIn, former Aviva Investors multi-asset fund
manager Thomas Wells said: "Daily traded open-ended property funds
do not work. I'm pleased to see that Aviva have finally given up on
such a structure.
"So the next question is fees: have Aviva been charging an
[annual management charge] during suspension and will they continue
to charge a fee while the fund is being unwound?"
Website: www.fnlondon.com
(END) Dow Jones Newswires
May 20, 2021 11:07 ET (15:07 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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