AegonJun 23 2021

Aegon property fund closure could signal 'end' for sector

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Aegon property fund closure could signal 'end' for sector

The closure of Aegon's property fund could signal the beginning of the end for a structure which continues to suffer an inherent mismatch between daily trading and underlying liquidity.

The asset manager announced this morning (June 23) that it would close its open-ended property fund amid liquidity concerns, a month after Aviva Investors did the same.

Darius McDermott said this could signal the end of a sector that is fundamentally mismatched for daily trading.

“Whilst the FCA review is ongoing, there is a cloud over open-ended property funds. I wonder whether this is pointing to the end," he told FTAdviser.

Moira O’Neill, head of personal finance at Interactive Investor, said the news would raise further questions over the FCA’s delayed decision on a potential new structure for property funds. 

“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 enough to 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.”

However, Oli Creasey, property research analyst at Quilter Cheviot, disagreed with the idea that more funds would follow Aegon and Aviva.

“For the property fund sector as a whole, this is likely to mark the last of the closures, for now. The larger property funds are at much less risk of permanent closure, while the only other fund of similar size is run by BMO, which has seen better performance and as a result expect investors to continue to reward it with patience. 

“With regulatory changes pending and an uncertain outlook for commercial real estate, however, times are only going to get tougher for property funds.”

Aegon’s fund was the last open-ended property fund to remain suspended in light of valuation and liquidity challenges during the pandemic.

It had reached a cash position of around 32 per cent, but even this was seen as not enough to fulfil the redemptions requests it anticipated to receive on re-opening.

The fund is one of the smallest in the industry, valued at around £367m compared with L&G and M&G’s property funds which are £2.2bn and £2bn respectively.

Office exposure

Aegon’s fund may also have suffered from its exposure to offices on the outskirts of London. 

The fund has a 24.7 per cent weighting towards non-London south east offices, according to the latest factsheet in Q1 this year. 

This is higher than MSCI and AREF’s benchmark from its quarterly fund index, which shows an industry average of 8.7 per cent exposure to south east offices. 

Creasey said these assets suffered from a high vacancy rate during the past year.

He said: “The fund is not overly exposed to retail or leisure – arguably the biggest problem sectors in UK property at present - however, it is heavily underweight the high-flying industrial sector, and has significant exposure to regional (excluding London) office property, which has also struggled during the pandemic.

"With a high vacancy rate, the fund has clearly felt the full effects of the pandemic and struggled to turn this around. Its vacancy rate has rocketed to 23 per cent despite being at just 1.2 per cent two years ago.”

He added: “The broader UK property market returned 6 per cent over the same period, while the average property fund returned -1.6 per cent, so significant underperformance will also have contributed to this decision.”

McDermott said that although these tertiary assets would provide a higher yield, they were much harder to sell.

“You’ve still got a better chance of selling a London office than one in a tertiary region,” he told FTAdviser.

What happens now

Ryan Hughes, head of active portfolios at AJ Bell, said the challenge for Aegon was to ensure investors aren’t out of pocket when it sells the fund’s assets. 

“The challenge Aegon now has, like Aviva, is that the market knows they are a forced seller and this may make it difficult to sell down the underlying properties at the right price.

"As we have seen with the Woodford fund closure, getting the balance right between time and price is extremely difficult and sensitive and therefore the clear communication of this is key.”

Aegon told investors that it would pursue the sale of all its properties and intended to make a series of payments throughout the closure period as the sales are completed.

Once the funds have closed, investors will be advised when distributions will begin

McDermott said that none of this was good news for investors, who haven’t been able to access their cash for over a year.

“Is this good news for investors - probably not. They can’t get their money back for a while, and what [Aegon] will probably do is pay it back in phases. 

“So you’ve still got this holding that you can't trade and you're going to get your money back in dribs and drabs.”

 

 

 

sally.hickey@ft.com