Aegon will close its UK Property Income and its feeder funds after failing to raise sufficient liquidity since gating the funds last year.
The funds were first suspended in March 2020, following the onset of the Covid-19 pandemic and the resulting uncertainty over valuations in the UK property market.
Aegon said it had hoped to lift the suspension in the first quarter of this year, however, it had proved “increasingly challenging to raise sufficient liquidity” while ensuring investors have a “representative and well-balanced portfolio.”
The firm said it is aiming to return the proceeds to investors as quickly as possible.
The news follows an announcement from Aviva Investors in May that it would close its property fund over similar concerns.
Oli Creasey, property research analyst at Quilter Cheviot, said: “The decision by Aegon to close its property fund doesn’t come as a surprise. The fund was considered to be at risk earlier this year, a view that hardened following the news in May that a similar fund at Aviva was taking this same course of action.
“The fund has been struggling for some time with one year returns particularly disappointing, especially when considering that a considerable percentage of assets were held as cash throughout this period.
“The broader UK property market returned circa 6% over the same period, while the average property fund returned -1.6%, so significant underperformance will also have contributed to this decision.”
According to Creasey, while the fund is not overly exposed to retail or leisure, it is underweight in the industrial sector and has significant exposure to regional office property which has struggled during the pandemic. The fund’s vacancy rate has risen to 23% from 1.2% two years ago.
Creasey added: “For the property fund sector as a whole, this is likely to mark the last of the closures, for now. The larger property funds are at much less risk of permanent closure, while the only other fund of similar size is run by BMO, which has seen better performance and as a result [we] expect investors to continue to reward it with patience.
“With regulatory changes pending and an uncertain outlook for commercial real estate, however, times are only going to get tougher for property funds.”
Darius McDermott, managing director of Chelsea Financial Services, commented:“The majority of the challenges facing this part of the market have come on the back of the turbulent conditions created by Covid last year.
“Clearly it is taking time for these vehicles to raise liquidity amid so much uncertainty, and while the FCA review is still ongoing, the fact a couple of funds are now closing their doors is creating major questions over the long-term viability of open-ended commercial property funds.”
Ryan Hughes, head of active portfolios at AJ Bell, said: “Given the fund size had fallen to under £400m and would be expected to fall further upon any reopening, it was likely that the fund wouldn’t be viable in the long run and therefore it looks as if Aegon have made the sensible decision to wind up the fund. As ever, in this situation, it’s vital that Aegon communicate quickly and clearly with investors so they understand how the process is happening and most importantly, how long it’s likely to take.
“The challenge Aegon now has, like Aviva, is that the market knows they are a forced seller and this may make it difficult to sell down the underlying properties at the right price. As we have seen with the Woodford fund closure, getting the balance right between time and price is extremely difficult and sensitive and therefore the clear communication of this is key.”