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?"




(END) Dow Jones Newswires

May 20, 2021 11:07 ET (15:07 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.
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