Q. What change has happened to the Aviva Investors Property Trust (AIPT)?
A. On Monday 14th December 2015 a decision was taken by Aviva Investors UK Fund Services Limited (Aviva Investors) to switch the fund from an offer-price basis to a bid-price basis following a trend of negative net cash flows.
Q. What impact did this have on our UK Property Funds?
Our UK Property Funds invest in the Aviva Investors Property Trust. The change in the pricing basis of the Aviva Investors Property Fund led to a decline of between 5.2-5.3% across Aviva’s UK property funds available to Irish customers.
Q. Why has Aviva Investors changed the pricing of the fund?
A. When the fund is experiencing generally positive net daily cash flows, for anyone redeeming units, the Manager is effectively able to “sell” their holding to new investors, thus being able to offer terms to exiting investors that do not reflect the costs involved with transacting in the property market. The fund has recently experienced fewer inflows than outflows and as a result it has not been possible to match sellers coming out with buyers going in. Therefore it may be necessary to cancel units in the fund to meet redemptions. When this occurs, the bid-price (the price investors receive when selling units) must be equal to the cancellation price to protect the interests of remaining investors. This bid-price is based on the possible requirement for assets to be sold and so units are generally priced on a minimum valuation basis which takes account of the cost of selling the underlying assets.
Aviva Investors, as with other companies, monitor cash flows on a continual basis and will manage the pricing basis as part of the normal business process. Once they experience sustained positive cash flows into the fund they will move the funds back to an offer price basis.
Q. Why has pricing basis changed so quickly after the previous change?
A. Since the change in pricing basis last week to an ‘Offer Basis’, Aviva Investors have seen a number of investors choose to redeem their holdings in the Fund. Therefore in order to protect all existing investors within the Fund they have decided to revert to a ‘Bid Basis’ with immediate effect. Their focus always remains to ensure that existing investors within the Fund are not disadvantaged by having to bear significant costs due to the actions of investors leaving the Fund.
Q. Is this change because of a lack of liquidity in the fund?
A. This change in dealing basis does not reflect any change in the liquidity of the fund. The Aviva Investors Property Trust held 12.8%, which equates to in excess of £257 Million as at 30 November 2015, of its assets in cash, which is in-line with their long-term targets - so the fund has cash available to meet foreseeable redemption requests.
Q. Why do we have a different pricing basis for property funds?
A. When a fund is growing, cash flow into the fund needs to be invested in underlying assets and so units are generally priced on an offer (maximum) valuation basis which takes account of the cost of purchasing the underlying assets.
When a fund is contracting, cash flow from the fund to customers may require at some point assets to be sold and so units are generally priced on a bid (minimum) valuation basis (which takes account of the cost of selling the underlying assets) to protect the interests of remaining investors in the fund.
In property funds, the cost of purchasing, such as stamp duty and legal fees, or disposing of property assets is more significant than for other forms of assets. This therefore leads to a bigger difference in the price investors receive for selling units when pricing on a ‘bid basis’ compared with the selling price using an ‘offer basis’ – typically this has been up to 6%. The actual difference will depend on the weighting of the portfolio towards direct real estate, listed securities/bonds and cash.
Aviva Investors, like other companies, monitors the cash flow into and out of funds on a daily basis. Depending on the cash flow they move from an offer to a bid basis (and vice versa) as part of their normal business process. Therefore these price changes, whilst significant for a property fund, and relatively infrequent for this fund should be very much seen as a normal part of their business.
Q. What does this pricing basis change movement mean for you as an investor?
A. For those investors remaining in the funds the value of the unit price will decrease, for those choosing to sell, the cash in value will also have decreased.
Q. Has this happened before?
A. Yes. Aviva Investors experienced outflows from this fund in 2007, 2011 and earlier in 2015. There is no pre-determined duration for any pricing change. It will depend on underlying cash flows in and out of the fund. Once Aviva Investors are satisfied that there is a trend to illustrate that the fund is expanding again they will review the pricing and are likely to revert to a full offer basis.
Q. What’s Aviva Investors outlook for the UK Property Market?
Aviva Investors’ view remains that the outlook for real estate returns remains positive over the short and medium term. Capital growth remains the key to near term prospects and they expect further capital performance in the near term given the continued healthy investor demand and the attractive valuation case for the asset class in such a low yield world. As such above-trend returns look set to continue into next year with good higher yielding assets likely to do especially well.
Source: Aviva Investors Monthly UK Property Report, November 2015.
Important information
Except where stated as otherwise, the source of all information is Aviva Investors as at 15 December 2015. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.
Aviva Investors approach to valuing property funds reflects standard industry practice for all investment funds, though the impact on property funds by the price moving from an offer to bid-price basis and vice versa is greater than it would be for equity and bond funds because of the higher buying costs associated with property. Aviva Investors believe that it is fair and equitable to both new and existing investors.
Where funds are invested in property, investors may not be able to switch or cash in their investment when they want because property in the fund may not always be readily saleable. If this is the case we may defer their request to switch or cash in their units. The value of property is a matter of a valuer’s opinion rather than fact. The cash weighting of the fund depends on a number of factors and may vary over time.
