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QD view – Property funds to fall like dominoes?

QD view - Property funds to fall like dominoes?

In what could be the first domino to fall, Aviva decided to wind up its open-ended property fund, more than a year after it suspended dealing in the fund. What does this mean for the future of open-ended property funds?

One option that doesn’t end in the liquidation of the fund but still gives investors the chance to exit, is to convert these funds into listed real estate investment trusts (REITs).

The listed company would have to buy the assets from the open-ended fund and unitholders would need to be offered the chance of a cash exit. However, a significant obstacle may be that the new independent board could at one stage decide to sack the manager.

However, for funds in difficulty, there would be no need for forced selling, gating the fund or holding ridiculous amounts of cash reserves.

The £367m Aviva Investors UK Property fund will close on 19 July and the proceeds from liquidating the fund returned to investors – eventually (it could be two years until investors see some money). Running the fund with enough cash to satisfy the likely level of investor withdrawals when it reopened became untenable for the fund. And there in lies the problem with open-ended property funds.

Due to the liquidity mismatch of daily trading in the funds’ shares and the lengthy process of selling a property, cash reserves have swelled over the years – some now hold upwards of 20%. Having such a large portion of your investment not producing any return seems utterly pointless.

Most property funds have now reopened, after blocking investor withdrawals last year when the pandemic struck. However, £1.6bn has been withdrawn by investors in the past six months.

The Financial Conduct Authority has delayed reforms of open-ended funds that could require investors to give 180 days’ notice of withdrawals. It seems absurd that investors should make investment decisions six months ahead of time.

It is becoming impossible to think that open-ended property funds will continue in their current form.

To satisfy the large volumes of withdrawals, funds have had to sell their crown jewels. Let me tell you, they won’t be getting a fair price for them either. A forced seller is a sitting duck in the property world and these funds have become feeding grounds for property investors.

With the Aviva Investors UK Property fund becoming the first domino to fall, open-ended property funds seem to have had their day. Converting to a closed-end structure could be their only option besides a costly liquidation.

QD view – Property funds to fall like dominoes?

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