In what could be the first domino to fall, Aviva decided to liquidate its open-ended real estate fund, more than a year after suspending activities in the fund. What does this mean for the future of open-ended real estate funds?
An option that does not end with the liquidation fund but still gives investors the option of exiting, is to convert these funds into listed real estate investment trusts (REITs).
The listed company should buy the assets of the open-ended fund and unitholders should be offered the option of a cash outflow. However, a significant obstacle may be that the new independent body Read our guide to Boards and Directors" class="glossary_term">plank could at some point decide to fire the manager.
However, for troubled funds, it would not be necessary to conduct a hard sell, freeze the fund, or hold ridiculous amounts of cash reserves.
The £ 367million Aviva Investors UK Property fund will close on July 19 and the proceeds from the fund’s liquidation will flow back to investors – eventually (it could be two years before investors see any money. ). Managing the fund with sufficient liquidity to meet the likely level of withdrawals from investors when it reopens has become untenable for the fund. And this is where the problem with open real estate funds lies.
Because of liquidity The inadequacy of daily fund stock trading and the lengthy process of selling a property, cash reserves have swelled over the years – some now hold more than 20%. Having such a large chunk of your investment producing no return seems utterly pointless.
Most real estate funds have now reopened, having blocked investor withdrawals last year when the pandemic struck. However, £ 1.6bn has been withdrawn by investors in the past six months.
The www.fca.org" class="glossary_term">Financial conduct authority delayed open-ended fund reforms that could require investors to give 180 days’ notice of withdrawal. It seems absurd that investors make their investment decisions six months in advance.
It becomes impossible to think that open-ended real estate funds will last in their current form.
To satisfy the large volumes of withdrawals, the funds had to sell their crown jewels. Let me tell you, they won’t get a fair price for them either. A forced seller is a sitting duck in the real estate world and these funds have become a source of food for real estate investors.
With the Aviva Investors UK Property fund becoming the first domino to fall, open-ended property funds seem to have had their day. Converting to a closed structure might be their only option besides a costly liquidation.
QD view – Real estate funds are falling like dominoes?
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