In the wake of the UK’s decision to leave the EU, investors became concerned over the prospects for the UK property market. As a result the managers of the Aviva Property Fund, Mike Luscombe and Andrew Hook, received a large number of requests to sell units in the fund. This caused the fund’s cash level (from which the managers usually meet redemptions) to fall to a level they were unhappy with, which led Aviva to halt trading in the fund on 4th July 2016. At the time, Aviva did not indicate how long the fund would remain closed. They have now confirmed trading in the fund is likely be suspended for at least six to eight months.
When a large number of investors request a return of their capital the manager often needs to sell properties to meet the redemptions and retain an adequate cash buffer. In falling markets it is often only possible to find buyers for the most attractive properties, leaving the least attractive ones in the fund. The managers may also be required to accept less than fair value in return for a quick sale. Both scenarios negatively impact remaining investors in the fund. To avoid this, the managers halt redemptions to allow more time to find suitable buyers.
In recent years, the managers have aimed to improve the quality of properties owned by the fund. They have sold older buildings in poorer locations and replaced them with modern, well-located properties in areas where demand exceeds supply. The sales initiated by the managers over the coming months will be in line with this approach; sales will be focused on properties the managers feel are unlikely to grow in value any further and those where there is the opportunity to sell at a premium price.
The fund holds a range of properties, including offices, high street shops, shopping centres, out-of-town retail parks, distribution warehouses and leisure facilities. The underlying properties, and the rents received from them, should be unaffected by the fund’s closure and investors will continue to receive income payments.
We view the fund’s closure to be correct given the circumstances. While it will inconvenience those who need access to their capital, as investors are unlikely to be able to sell the investment until 2017 at the earliest, it will give the managers time to achieve a fair price for any properties they want to sell, which should be beneficial for long-term investors.