Aviva changed the basis for pricing its Irish Property Fund from a “disposal basis” to an “acquisition basis”. This change resulted in a 5% uplift in the unit price in June. This change in pricing basis has been made as a result of Aviva having experienced a pattern of positive cashflow to these funds over the past number of weeks.
Change to the Pricing basis of the fund:
A change in a fund pricing basis, from acquisition to disposal basis (or vice-versa) can result in a significant unit price movement within a very short period of time (i.e. the pricing basis can change daily). The change in unit price will depend on the allowance for dealing costs in buying and selling assets within that fund and the value of assets within that fund at the time of the pricing basis change.
Why might a property fund’s pricing basis change?
A property fund incurs relatively high up-front costs (stamp duty, legal expenses, agency or auctioneering fees and VAT) each time the fund acquires or sells a property. These costs are not passed on to clients in the form of up-front charges, as this would mean that charges applied to any particular client would be dependant upon the timing of that clients investment (resulting in an inequitable situation between investors in the fund). Clients who invest in our unit linked property funds therefore do so without having to pay large up-front charges that are normally associated with direct property investments.
However, if a large volume of encashment requests are received, this will result in cash outflows from the fund. Where cash outflows exceed cash inflows the fund manager may have to sell property(s) in order to generate cash to meet encashment requests. In such cases, the fund may be priced on a disposal pricing basis, so that those clients who decide to exit the fund are paying their fair share of the costs incurred in selling the property within the fund. The purpose of such a pricing change is to protect the remaining clients in the fund from subsidising clients who are leaving.
Similarly, when a fund has positive cashflow (i.e. more cash is being invested in the fund than is being encashed), then it is generally acquiring new assets on a regular basis. In this scenario the costs involved in acquiring assets are added to the value of the fund’s assets when the unit price is being calculated to ensure equity between those policyholders entering the fund and those already invested in the fund.
The fund reduced its price by 12.25% in 2007, why isn’t the fund increasing its price by 12.25%?
Aviva changed the pricing basis of the Irish Property Fund from acquisition to disposal basis on 13 Dec 2007. The change resulted in a fall in the price of the Irish Property Fund of approx. 12.25% at that time (based on the difference in acquisition and disposal costs on that time). The difference between acquisition and disposal pricing bases in the case of Irish property funds is chiefly accounted for by stamp duty, legal expenses, agency or auctioneering fees and VAT. There have been two reductions in commercial property stamp duty since December 2007 – in the budget of 2009 (from a top rate 9% to a top rate of 6%) and 2012 (from a top rate of 6% to a flat 2%). This reduction in stamp duty has had the effect of decreasing the gap between the disposal and acquisition pricing basis for the Irish Property Fund and hence the impact of pricing basis change made in June 2013 was +5%.
