Aegon Asset Management has decided to close its Property Income fund and feeder funds after failing to raise enough liquidity after a 15-month suspension.
The £381m fund was the first in the UK direct property sector to suspend last March after market turmoil from the coronavirus crisis made it impossible to determine the value of its underlying assets. All the major funds in the sector promptly followed suit.
While Aegon had been hoping to lift the suspension in Q2 2021, the fund group said it had become “increasingly challenging to raise sufficient liquidity whilst also ensuring that continuing investors have a representative and well-balanced portfolio”.
“Accordingly, in order to ensure all investors are treated fairly, Aegon AM has decided to take steps to close the funds and return the proceeds to investors as quickly as possible, in a fair and orderly manner,” the firm said.
Investors could be waiting two years to get their money back
A spokesperson for Aegon AM told Portfolio Adviser the firm is continuing to raise liquidity by selling down the existing holdings and expects to get final approval to begin the wind-up process in Q3.
However investors could face wait times between 12 to 24 months before they get their money back.
“We hope to inform investors when distributions will be issued in the middle of July and to begin the initial distribution of proceeds in Q3,” the spokesperson said. “We will keep investors regularly updated on our progress.”
Follows hot on the heels of Aviva UK Property closure
Aegon Property Income is the second property fund to close its doors recently. Last month Aviva Investors called time on its UK Property fund, citing similar concerns about shoring up enough liquidity.
Commentators had expressed doubts about both funds being able to re-open due to their small size compared with other rivals in the sector. Both had under £400m in assets, meaning they would have struggled to cope with a potential wave of redemptions upon re-opening.
Given this AJ Bell head of active portfolios Ryan Hughes said Aegon’s decision was “sensible”.
“As ever, in this situation, it’s vital that Aegon communicate quickly and clearly with investors so they understand how the process is happening and most importantly, how long it’s likely to take,” Hughes said.
“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.”
Silver lining for investors is 32% cash weighting
GDIM investment manager Tom Sparke notes Aegon Property Income had been “one of the better actors in this space” in terms of keeping liquidity high and suspensions to a minimum. It was one of the few authorised property funds to remain open five years ago after the Brexit vote triggered a wave of redemptions across the sector.
While Aegon Property Income was not overly exposed to retail or leisure, the biggest problem sectors in the UK property market, Quilter Cheviot research analyst Oli Creasey notes “it is heavily underweight the high-flying industrial sector” and has significant exposure to regional offices outside London which have been hit hard during the pandemic.
The fund’s vacancy rate, which was 1.2% two years ago, has skyrocketed to 23%, he said.
“The silver lining for investors is that the closure accelerates the return of some cash with most of the 32% cash weighting is available to pay out,” he said.
FCA ‘dithering’ has hurt daily dealing property funds
Recently the economic downturn and national lockdowns triggered by the Covid pandemic has plunged the direct property sector into the throes of a crisis and created huge uncertainty about the future of daily-dealing property funds.
Suspended funds that have re-opened have faced mass redemptions, including the M&G Property Portfolio which saw £800m walk out the door a month after it began trading as investors rushed for the exit. Meanwhile the Financial Conduct Authority has been dragging its feet coming up with a solution to daily dealing property funds’ liquidity mismatch problem.
“The sector is massively under the cosh at the moment,” said Fairview Investing director Ben Yearsley. “The FCA dithering is not helping – in fact it’s their intransigence in my view that has added to the problems of the last 18 months or so.”
Sparke said he decided not to use open-ended property funds years ago over concerns about liquidity. “It seems like many others have followed suit,” he said. “I fear that this will just be the most recent victim of an issue that will affect many others in the future.”