Aviva's property fund closure is not expected to have a big effect on the wider industry and many funds are expected to remain open, according to experts.
Ryan Hughes, head of active portfolios at AJ Bell, pointed to the smaller-than-average size of Aviva’s fund as the reason for its closure.
The fund currently has 12 assets, majority offices and retail, with a market cap of under £400m.
Hughes said this would mean the fund would need to carry around 30 per cent cash to fulfil withdrawal requests, equalling around £100m - narrowing the value of the fund’s assets to under £300m.
“I can see why from their perspective, they will look at that fund and say, if you're going to invest in commercial property, that fund is going to be subscale, and it's going to end up being a small fund that can only invest in small property. And that would create a different risk profile for the fund,” he said.
Hughes does not think other funds will follow suit, however. He said all other open-ended property funds were already open for trading with the exception of Aegon, which this month announced a tentative re-opening date as it continues to increase its cash position.
The fund, although smaller, is more diversified than Aviva’s, and holds around 42 properties compared to Aviva’s 12.
As for the other funds, he said: “I think they're all going to wait on the outcome of the FCA review which will set the tone as to what happens for the future of the rest of these funds.”
Oli Creasey, property research analyst at Quilter Cheviot, also believes larger funds are at less risk of closure.
He said: “The conditions that brought about the Aviva fund’s demise are somewhat unusual, and most of the other UK property funds are now open and in a better position, if not all at full health.
“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 become too small to justify operating.
“We think the larger property funds are at much less risk of permanent closure. The only other fund of similar size is run by BMO, although the performance of this fund has been much stronger (-3.4%), and we expect investors are more comfortable as a result.”
Aviva announced yesterday (May 19) that it would shut down its fund. The fund, which has been closed since March last year, will remain gated until July 19 when it will be terminated.
The closure of Aviva’s fund comes amid a wider industry debate over open-ended property funds, and whether investors should be able to daily trade assets that are fundamentally illiquid.
The Financial Conduct Authority recently postponed its decision on notice periods for open-ended property funds while it looks into creating a new fund structure to address the issue.
The watchdog had released the results of its previous consultation on fund notice periods - which included a suggestion that investors in open-ended property funds could have to wait 180 days to get their money back.
But it said it needs more time to receive feedback on a new structure it is proposing to solve the issue - the long-term asset fund.
This concept was first outlined by the Investment Association in 2019 and is a new open-ended fund structure designed specifically to facilitate investment into long-term, illiquid assets.
Another way investors can get liquid exposure to property is through REITs, however the industry has been noticeably reticent to adopt them in place of open-ended funds.
Hughes said: “These properties trusts are trading on maybe 20 per cent discounts at the moment. And the trade off there is of course, you can get your money back tomorrow, but you're going to get 20 per cent less of the current price of the asset.
“It's up to investors to choose which one they want to follow.”
He added: “Ultimately, investors need to accept that there's a trade off between liquidity and access. You can't invest in illiquid assets and expect [the same access as] in liquid structures.”
Ben Yearsley, investment consultant at Fairview Investing, highlighted his surprise that more open-ended property funds haven’t mirrored BMO’s property growth and income fund.
The fund is a hybrid and invests around 30 per cent in direct property, and the rest in REITs.
“[The hybrid structure] gives you the best of both - it gives you less volatility than a pure REIT fund, access to unique assets, and it allows BMO to invest fully.”
The factsheet for Aviva’s fund said at least 70 per cent of the fund was invested in direct property.
sally.hickey@ft.com
