July 22, 2016 / 6:00 PM / 3 years ago

Aviva's frozen property fund resists fire-sale temptation

LONDON (Reuters) - Aviva Investors aims to steer clear of costly fire sales from its frozen property fund and will decide when to reopen for business once it has more concrete market data, the asset manager’s CEO told Reuters.

Open-ended property funds have been among the biggest casualties of a nosedive in investor sentiment after Britain’s vote last month to leave the European Union, with Aberdeen Asset Management ADN.L disposing of some prime UK assets to bolster its cash reserves.

In early July Aviva Investors, the fund arm of British insurer Aviva (AV.L), joined peers including Aberdeen, Standard Life Investments SL.L and Prudential’s (PRU.L) M&G in suspending funds managing more than 18 billion pounds ($23.59 billion) of UK property as recession fears gathered momentum.

Other property funds continued trading, but managers cut their value to reflect expectations of lower commercial property prices.

Open-ended property funds typically hold single-digit percentages of cash as a proportion of overall assets to service exit requests by investors without having to sell buildings.

But when that cash runs out, fund managers must decide between locking up investor money or offloading some of their holdings to opportunistic buyers who can do deals quickly but want big discounts.

REDEMPTIONS SPIKE

The Aviva Investors Property Trust had a spike in redemption requests after the so-called Brexit referendum, cutting its liquidity levels, CEO Euan Munro said.

The fund’s value on the day of suspension was around 1.6 billion pounds ($2.10 billion), of which around 4 percent was in cash, with the majority of that cash earmarked for capital commitments, an Aviva Investors’ spokesman said.

Munro also said the firm felt its retail and office assets could not be valued accurately, so it chose not to write down the value of the fund, unlike some of its rivals.

“[The valuations of] these funds are based on actual transactional data, they are not based on sentiment,” Munro told Reuters. “It wasn’t so much liquidity, it was the fact we really didn’t know where to strike the price.”

Property specialists have said they expect the funds to remain shut until at least October.

Munro does not have any set date in mind for the Aviva fund to reopen and said the company is waiting for more data on actual property transactions to help it to value the fund.

The former Standard Life Investments star fund manager conceded that the reputation of Britain’s open-ended real estate funds had taken a knock, but he said that a rush to sell assets at knockdown prices could be more painful for investors than waiting for hard evidence of real estate values.

“I believe we are following the correct governance for our funds, and I am prepared to defend it and I’m sure other guys are prepared to defend what they are doing.”

ASSET SALES

There is little evidence of the kind of panic selling that followed the U.S. sub-prime mortgage crisis, though Aberdeen did sell a London retail and office property to Norges Bank Real Estate Management for 124 million pounds in a deal that took only four days to complete.

It sold a second prime office block to private equity firm Brockton Capital for about 90 million pounds, sources close to the matter said.

The buildings were sold at investment yields of 3.5 percent and 6 percent respectively, representing discounts of 14 percent and 17 percent on book values, the sources told Reuters.

Aberdeen declined to comment, but the sales and a drop in the volume of investors queuing to pull out their cash allowed it to bring some cheer to the depressed market on Thursday by cutting a levy on exits from its UK real estate funds. It had lifted its suspension on withdrawals on July 13.

Financial Conduct Authority chief Andrew Bailey, who summoned managers of suspended property funds for questioning on how they were protecting investors, said he had seen signs of calm returning to the market.

“The latest evidence we have is that the position is stabilizing, the pattern of withdrawal requests versus investment requests has gone much more into balance,” Bailey told Britain’s parliament on Wednesday.

Additional reporting by Huw Jones; Editing by David Goodman and Adrian Croft

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