Open-ended Property Funds


I read about Standard Life's gating of its open ended property fund with some incredulity. Aviva and M&G have subsequently followed. Interestingly Aviva had a problem a little while ago when its fund manager left and it moved to a bid-offer spread for redemptions - now I can understand that when a manager leaves an equity fund or a bond fund, you might want to redeem immediately, but surely a property fund would have a little more longevity?

I hope someone can explain why these well-respected investment institutions follow a clearly flawed practice of allowing daily liquidity when their assets are long term, difficult to trade and where transactions incur significant frictional costs and generally should be avoided except at points where there exist major over or under-valuations.

I understand that people want to be able to invest in property and that some may require shorter term access to the money. Vehicles exist for that-  they are known as REITs. These funds which presumably offer daily liquidity at the margin where they match buyers and sellers make no sense for long term physical property assets. Of course the issue with REITs is that they represent an effective daily mark to market, they are subjerct to the vagaries of the stock market and they often trade at a discount to the value of the assets. Most important, they do not affford the opportunity for investment instituitions to charge a management fee. 

And the risks of gating in the event of a Brexit should certainly have been made much clearer to the retail investors who are undoubtedly the participants now running for the exit. What now? Will the funds circulate all shareholders and ask them their intentions and indulge in a wholesale fire sale of assets? Closing the gate is sensible to avoid disadvantaging other holders, but presumably now they must seek another form of structure and lock in their investors or at least those who wish to stay. And of course the timing could not be worse, as who is going to want London commercial offices (I have no idea, but I imagine they will be the largest component of these portfolios) given the Brexit uncertainty - buyers will surely demand a discount for this risk. Last time I looked the major property stocks were trading at a 30%+ discount to NAV, and these funds will be perceived as forced sellers.

This is a mess which could easily have been avoided, and I hope these institutions give their investors a sensible exit. My suggestion is they split the assets - they should offer the investors the choice of a long term fee-bearing locked up vehicle or a closed end investment trust or cash. The investment trust will give investors their daily liquidity requirement, albeit at the expense of a market discount. The split of the assets could be controversial, but at least they can then correctly match investors' needs.