As Aegon closes its Property Income fund and feeder funds, are we ignoring the elephant in the room on property funds?
- Aegon has shuts its property fund amid ongoing liquidity problems
- Rather than trying to bend the structure to address the problem, the industry should admit that these are not the right vehicles for illiquid assets
- Investment trusts have seen far fewer problems and are recovering more quickly
This week, Aegon became the latest group to shut its property fund due to ongoing liquidity issues. Investors, it seems, have lost their appetite for commercial property, creating selling pressure at a time when fund managers are struggling to offload their holdings in the market due to lack of demand.
The FCA is busy trying to address the problem. It has mooted fixed redemption periods of 90-180 days, but there remains a significant question over whether this will be long enough. After all, it is not clear that the challenges for parts of the commercial property market will be resolved in three or even six months. Will a market suddenly appear for a high end shopping centre, for example?
Funds have also been trying to raise their cash buffers. This certainly helps meet the demands of groups who want to liquidate their holdings. However, it exerts a greater cash drag on the portfolio over the longer term, lowering the capital return and yield available for investors.
Isn’t it time that the industry admitted that the open-ended structure is not an appropriate vehicle for illiquid assets such as property? Rather than trying to bend the structure to address the problem, isn’t it time to call time on these large property funds and/or convert them into more appropriate vehicles?
The commercial property sector isn’t an awful place to invest. There are already signs that it is re-generating, adapting to the new norms of working, shopping and living. However, it will need investment to do so and it is difficult to see how the open-ended structure facilitates that investment. Perhaps more importantly, it is difficult to see how these funds can give investors access to the best commercial property opportunities. After all, no open-ended property fund is in a position to cherry-pick any bargains in the market today.
There are challenges to a blanket ban on open-ended funds holding illiquid assets, of course. Where is the liquidity line drawn? After all, liquidity is fluid, tending to be there when investors don’t need it and not when they don’t. But how many liquidity crises does the open-ended sector need before it takes the lessons on board? In the meantime, investors will need to do their own homework.
