Two property fund closures in two months: what next?

Aegon is to close its Property Income fund and feeder funds a month after Aviva Investors' decision to close its UK Property Fund and feeder funds.

Today’s reports that Aegon is to close its Property Income fund and feeder funds due to ongoing liquidity issues, following suspension over a year ago, is another sad story for property fund investors. It comes just one month since Aviva Investors decided to close its UK Property Fund and feeder funds.

Moira O’Neill, Head of Personal Finance, interactive investor, says: “We said last month that the Aviva closure was unlikely to be the last, and today marks another sad chapter for property fund investors. It will raise further questions about how long the FCA’s much-mooted fixed redemption periods will need to be: 90 – 180 days always felt too optimistic; now it looks like pie in the sky.

“While we await the outcome of the FCA’s property fund consultation, we think redemption periods will need to be fixed, so as not to cause confusion for investors, and significantly long enoughto ensure there is time to address the liquidity mismatch. How long is long enough is arguably getting increasingly difficult to answer, but confidence does need to be restored.

“We’ve always preferred the closed-ended structure when it comes to investing in illiquid asset classes, like direct property. This structure isn’t perfect, but it does mean that investors can head for the emergency exit if they need to. And, important but often overlooked – they can buy whenever they spot an opportunity.”

Kyle Caldwell, Collectives Editor, interactive investor, says: “In response to fund suspensions that took place following the EU referendum, property funds raised cash levels in an attempt to avoid future fund suspensions at times of market stress. With the benefit of hindsight, higher cash weightings (with cash positions typically ranging from 15% to 30%) did not have the desired effect.

“Higher cash weightings are a drag on a property fund's performance and lower its dividend yield. In addition, most funds have not reduced their fund charges to take into account the higher cash weightings. 

“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 of this, property trusts offer greater liquidity and can be fully invested without concerns over liquidity. Bear in mind, however, that selling during a period of market stress may mean selling at a lower level than desired if there is a rush to the exits. Indeed, during the first quarter of last year investment trust discounts and share prices slumped notably.  

“Therefore, while the upshot with open-ended commercial property funds is the prospect of investors not being able to access their money, panic-selling is a comparable problem for investment trusts. Managers of trusts are not forced to sell property to redeem investors, but the market can take a dim view of the outlook and force down share prices. However, the widening of trust discounts at such times may be viewed as opportunity by some investors.”