Aegon Asset Management has become the second fund giant to close its property fund within a month, due to liquidity issues in the sector stemming from subsiding valuations in the property market.
The Dutch investment group is closing its Property Income fund, which has been suspended since March last year as the UK property market was rocked by the coronavirus pandemic.
Aegon said it has proved “increasingly challenging to raise sufficient liquidity whilst also ensuring that continuing investors have a representative and well-balanced portfolio".
Managers plan to close the fund and sell all properties owned by the fund to return the proceeds to investors, with a series of payments as sales are completed.
Last month Aviva Investors said it was winding up its UK property fund, which has also been in stasis since last year, saying it had become “increasingly challenging to generate positive returns while also providing the necessary liquidity to re-open the fund”.
With long-standing criticism that open-ended funds are not suitable vehicles for investing in property due to the difficulty in liquidating the underlying assets, the Financial Conduct Authority is carrying out a consultation into the property fund sector and last August proposed enforcing a 180-day notice period for open-ended property funds.
Even before the pandemic, some property funds were forced to suspend redemptions due to investor worries about Brexit.
“We said last month that the Aviva closure was unlikely to be the last, and today marks another sad chapter for property fund investors," said Moira O’Neill, head of personal finance at Interactive Investor.
She said it will raise further questions about the length of the FCA’s fixed redemption periods, with 90-180 days now "looks like pie in the sky".
O'Neill added: “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.”
Investment trusts, due to their closed-ended structure and fixed level of capital, are not under the same pressure to react defensively when investors take fright and do not need to sell the properties they own.
McDermott, managing director of Chelsea Financial Services, said: “The majority of the challenges facing this part of the market have come on the back of the turbulent conditions created by Covid last year. Clearly it is taking time for these vehicles to raise liquidity amid so much uncertainty, and while the FCA review is still ongoing, the fact a couple of funds are now closing their doors is creating major questions over the long-term viability of open-ended commercial property funds.”
On Aegon's fund, Ryan Hughes at AJ Bell said given the fund size had fallen to under £400mln, it did not look viable in the long run.
“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."