Posted by Flora Maudsley-Barton | August 10, 2016
Why is my property fund suspended?
This blog post is for you if you would like a ‘plain English’ explanation of the property fund suspensions, levies, postponed surrenders and property fund penalties that we have heard about recently.
In early July, property funds began to announce suspensions, this means that nobody can invest into the fund or sell from it until the suspension is lifted.
Property funds are 'different' to other investment funds; the fund manager has a really long term plan. For example, they buy a building, commercial property such as an office block, industrial units or a shopping centre, then they plan to own it for decades to enjoy the rent from it. The fund manager estimates how many people will put money into the fund (invest) and want money out of the fund (surrender) during that time, to manage the fund's cashflow.
They have an extra layer of protection, which is the right to delay surrenders, if surrenders are putting too much pressure on cashflow.
For you, as an investor with a long-term investment timeframe, this has come as a surprise because you weren't planning to surrender. Nor should you surrender; if commercial property was a suitable part of your portfolio until June 2016, then it still is. We are still recommending commercial property as a part of almost all of our portfolios. We will work around the suspension until it is lifted.
Many of the commercial property fund managers have made some alteration to their rules for adding or removing money. Here is a summary of the funds we know best.
Aegon's Property Fund is suspended for withdrawals, but not for new investments. Aegon's default position is to let you continue investing throughout the suspension.
Aberdeen Property Fund was briefly suspended on 6th July, then it re-opened with a reduced price, known as a dilution levy, a 'fair value adjustment, like a penalty so that people could invest and surrender. The penalty was set at 7% on 13th July when the fund re-opened until 29th July and now the fund is running almost normally, with a small penalty of 1.25%. We expect that to continue for a while.
Royal London's property fund is unaffected.
These funds remain suspended, at the time of writing, so that no-one can invest or surrender:
• Aviva Investors Property Trust
• Henderson UK Property Fund
• M&G Property Portfolio
• Standard Life Real Estate fund
• Threadneedle Property Trust
So What Next?
We are continuing to review the suspensions and levies so that we can run our clients' portfolios as best we can.
We expect that commercial property will remain a core part of our portfolios for years to come. The rental yield is useful for our income investors and no-one likes the capital loss, but capital growth is good for everyone.
If you would prefer a more technically detailed explanation, please contact Flora directly.