Aberdeen stabilises property fund liquidity to penalty-free level

Aberdeen cut the dilution adjustment on the fund to 1.25% but said in a note on 29 July it was monitoring trading daily and may increase the adjustment without notice if required.

It said it had “completed the process of rebuilding liquidity levels in the Aberdeen UK Property Fund and the Aberdeen UK Property Feeder Unit Trust” and “trading in the funds has reverted to levels which no longer require property sales in a compressed timescale”.

Aberdeen’s property fund had suffered badly following the EU Referendum in June, with its price falling as much as 20% in the three weeks following the Brexit result after a rush of requests for withdrawals from investors.

However, thanks to the reduction in the dilution levy, the price is now 14% higher than at the fund’s low point of 13 July, according to Hargreaves Lansdown.

Aberdeen was the worst performing of a number of struggling property funds available to retail investors post-Brexit, followed closely by Kames, Legal & General and F&C property funds.

At one stage the fund manager imposed a 19% dilution levy to reflect the ‘cost of liquidity’, which is the reduction in price for selling property assets quickly.

The firm had originally applied a 17% dilution levy and temporary suspension to the fund,  which was later lifted. The levy was then reduced to 7% and has now been cut further to 1.25%.

The fund is still levying a 7% fair value adjustment to the underlying property portfolio, reflecting the valuer’s estimate of the loss to the commercial property market stemming from the Brexit vote.

Hargreaves Lansdown senior analyst Laith Khalif said the price movements of property funds over the past month have been “breath-taking” but he hoped Aberdeen’s move will show “things are getting back to some measure of normality in the UK property fund sector”.

He said: “Many investors will have chosen property as a safer alternative to the stock market. Yet in the three weeks following the Brexit vote, some of the biggest property funds saw more dramatic price falls than any UK equity funds, which are typically deemed to be riskier.

“This reflects a fundamental weakness in the structure of open-ended property funds, rather than extreme volatility in the underlying commercial property market itself.

“While things appear to be calming down for property funds, dilution levies are entirely dependent on fund flows and applied without prior notice, so investors are still playing lucky dip when they buy or sell one of these funds at the moment.”