M&G, Aviva and Standard Life Restrict Sales of Property Funds

M&G, Aviva and Standard Life have suspended trading of their open-end UK commercial property funds following the Brexit vote

Emma Wall 5 July, 2016 | 4:35PM
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and we've just heard that Aviva has followed Standard Life in suspending trading on their Property Fund. Joining me today to discuss this is Simon Molica from Morningstar Investment Management.

Hi, Simon.

Simon Molica: Hi, Emma.

Wall: So, what's happened?

Molica: Well, so as you correctly stated, yes, Aviva has also suspended trading on their fund following Standard Life announcing that yesterday. I mean, really what we need to do is take a step back. The issue here is liquidity. It's the mismatch between being an open-ended fund that deals daily and buying big commercial property which clearly is not daily liquid. It takes time to sell those types of properties. And the time it takes can vary depending on the cycle we're in and the price that they would require as well.

We've also seen developments over the last couple of weeks, months in terms of swinging prices. So, a lot of these funds, and they generally tend to follow each other that they swung their prices. They've also very recently had fair value adjustments.

Wall: Following Brexit?

Molica: That was following Brexit, absolutely. So, the articulation really there is that there has been an accelerating redemption period for these types of funds. So they are starting to see outflows really gain pace here and that really leads them to have to adjust therefore in these instances their valuations.

Clearly, the Brexit picture is very uncertain for everyone. But also now that we're seeing the suspension really is it would be – the way to best describe it I guess is just that they feel they are protecting investors' interest in this way by not having to sell a property instantly to meet those redemptions and that liquidity need. It means they can ensure potentially fairer prices, so they don't need to be seen predominantly as forced seller. They can manage that process a little better.

Wall: And this isn't the first time we've seen these kind of restrictions placed on property funds, is it, because back in 2008-2009 Aviva, who has obviously suspended trading today, and also New Start, among others, put these restrictions because back then of course the price of property was falling following the global recession and again, they wanted to protect the value of those underlying assets?

Molica: Yeah, you're quite right. It's not the first time. And sadly, it's probably not the last time either. There is a liquidity mismatch here. The FCA today also announced that they want to look into this further. They want to do more work. And really what that means is potentially we could see the structures changing in the future. Maybe there will be better management around their cash buffers or different management, potentially maybe they will move from daily dealing which in my opinion may not be a bad thing.

Wall: Simon, thank you very much.

Molica: Thanks Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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