Open-ended UK property fund to close amid liquidity concerns

It will take up to two years for investors to have their money returned to them. 

Aviva Investors is closing its UK Property fund more than a year since it was suspended. Aviva is also shutting two other feeder funds.

According to the asset manager, the fund is being shut due to it becoming “increasingly challenging to generate positive returns”, while maintaining the necessary liquidity required for the open-ended fund structure.

The fund, which has around £367 million in assets, was suspended in March 2020 owing to liquidity concerns, alongside a swathe of other open-ended property funds, during the start of the Covid-19 pandemic. The funds were closed due to the uncertainty of property values given the unprecedented nature of the situation.

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Several of the funds were reopened, such as Columbia Threadneedle and Aberdeen Standard Life. Aviva, however, remained closed.

Investors in the fund will receive an estimated 40% of their cash. The remainder will be subject to the sale of the fund’s assets over the next one to two years.

There has been a long running issue with property fund liquidity.

Open-ended property funds allow for daily withdrawals by investors. In an equity-focused open-ended fund, that would require the manager to sell shares to give investors their money back, which is usually a straightforward affair.

However, property is not daily valued nor quickly sold, meaning that if a large number of investors wish to withdraw from the fund at the same time, the fund will have to suspend redemptions. This also happened following the 2016 Brexit vote. 

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The regular suspension of property funds has prompted the Financial Conduct Authority (FCA) to consider new rules. The Investment Association (IA) has suggested an alternative structure for property funds, with longer investor redemption periods.

Investment trusts, due to their closed-ended structure, are not under the same pressure to react defensively when investors take fright. Trusts have a fixed level of capital, so they do not need to sell the properties they own. Instead, investors who wish to sell simply dispose of their shares. As a result, property trusts offer greater liquidity and can be fully invested without concerns over liquidity.