The sector was already hit hard by Brexit, then by lockdowns, and now by working from home as companies plan to cut floor space.
By Nick Corbishley for WOLF STREET:
Aegon Asset Management has closed its UK Property Income and Property Income feeder funds, after struggling to raise sufficient cash to meet redemption requests, it said on Wednesday. The Aegon Property Income fund had £380 million ($531 million) in assets under management and the feeder fund £150 million, according to Morningstar. The announcement follows a move last month by Aviva to wind up its property fund and two feeder funds due to the prevailing economic uncertainty and liquidity concerns.
Both the Aegon and Aviva funds were suspended in March 2020, alongside most other UK property mutual funds, due to the acute uncertainty over market valuations caused by the virus crisis as well as liquidity issues. Many of these funds are open-end, meaning they offer daily withdrawals to their (predominantly retail) investors, even though the funds’ core investment — offices, industrial property and retail parks — is extremely illiquid, often taking months to offload.
In times of financial stress and uncertainty, it’s not unusual for real estate to be plagued by acute liquidity issues. In June 2016, in the aftermath of the Brexit vote, six commercial real estate (CRE) funds suspended redemptions. But never before have so many real estate funds shut the doors on so many real estate investors. Since then most of the funds have reopened, although conditions remain tough. But neither Aegon or Aviva were among them. Their doors are staying shut.
“It has proved increasingly challenging to raise sufficient liquidity whilst also ensuring that continuing investors have a representative and well-balanced portfolio,” Aegon AM said in a statement. “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.”
Trapped investors will have to wait up to two years to be reunited with their funds. If the recent experience of other gated (and eventually wound down) funds is any indication, by that time the investors may find that the value of their investment has significantly shrunk.
Many of the property funds that did reopen are now suffering an exodus. The industry saw the second-worst month of outflows in May, according to data from funds network Calastone. UK investors redeemed £445 million of their investments in the funds during last month, the second worst month since Calastone began recording flows in 2015. The worst month was March this year when £589 million was withdrawn, compared with £314 million in February and £128 million in January.
The level of selling activity in May took the markets by surprise. April is normally a bad month for redemptions as investors book capital losses before the end of the tax year, as these can be used to limit capital gains tax liabilities. But normally May is better. But not this time.
“We cautioned that sharply lower outflows in April were likely to prove temporary, but we were surprised by the level of selling activity in May,” said Edward Glynn of Calastone, adding that rising fears about the seemingly more contagious delta variant of Covid may have hurt sentiment in a sector that has already been upended by endless lockdowns, travel restrictions, and work-from-home ordinances.
Brick-and-mortar retail tenants are not paying their rent, partly because a government moratorium on commercial rents means they don’t have to. And that moratorium was recently extended to next March. Many offices are still half empty and will stay that way until the government withdraws its guidelines urging people to work from home if they can.
“Anything that delays the return to offices and the removal of limits on capacity in hospitality, retail and leisure venues is bad for commercial property in the short term,” Glynn said. “Recent survey data suggests the long term may also be gloomier as companies plan to cut floorspace in future. This seems to have spurred further selling of property funds from investors who seem to be looking for reasons to be negative on the asset class.”
The UK’s property fund industry has shed £5.6 billion of funds after 32 consecutive months of net outflows, according to Calastone. The hardest hit fund, M&G Property Portfolio Fund, saw investors pull out £800 million in May after it reopened for business following 17 months of suspended redemptions. The outflows equated to 40% of total assets, according to Morningstar, with the fund shrinking from £2.1 billion to £1.3 billion in the space of just one month.
M&G Property Portfolio invests in commercial properties across the UK including offices, industrial property and retail parks, a sector beleaguered by retailer failures and crushed values. M&G’s property funds have been suffering a customer exodus since Brexit. According to Morningstar, the portfolio had only one month of positive flows since Britain voted to leave the EU in June 2016 before closing its doors in December 2019, four months before the UK went into its first lockdown.
Those doors were reopened just two months ago and investors are piling out of them even faster than before.
The problems suffered by these funds are a feature, not a bug, of an industry whose structure has been under question for over two years. The fundamental issue is the glaring mismatch between the daily liquidity the funds offer investors and the illiquidity of most of the assets they hold. The Financial Conduct Authority has proposed replacing the typical daily redemption notice period with notice of up to six months to prevent funds seizing up as investors stampede for the exit in times of market turmoil. But as of yet no definitive action has been taken.
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