The Financial Conduct Authority has launched a fresh consultation on open-ended property funds that could see investors forced to give up to six months’ notice to cash in units.
The consultation follows a rising number of redemptions and consequential suspensions on those redemptions over the past few years.
Data from fund transaction network Calastone showed that there was some £2.25bn of net outflows from UK property investment vehicles in 2019, with numbers continuing to rise through the first few months of 2020.
The FCA hopes that by requiring investors to give notice – potentially of up to 180 days – before they redeem their investments in funds, fund managers will be able properly to manage the sale of real estate assets better to meet requested redemptions.
At present, retail investors can buy and sell units as frequently as they wish. The trade of property assets, particularly in the current climate, takes significantly longer, however, which can often lead to a mismatch in liquidity.
FCA interim chief executive, Christopher Woolard, said: “‘We want open-ended funds to provide a structure through which investors can safely invest in less liquid assets which offer attractive expected returns and at the same time supports investment that benefits the wider economy. We hope the proposed new rules will directly address the liquidity mismatch of these funds making them more resilient during periods of stress, and allowing them to operate in a way that all investors are treated equally.”
Industry experts said that while the introduction of a notice period on the sale of units was a simple way of balancing out the liquidity mismatch, it was not an adequate solution.
John Forbes, independent consultant and author of the Association of Real Estate Funds’ report into the behaviour of UK real estate funds following the 2016 EU referendum, said: “Notice periods are the simplest way of achieving a greater match between the liquidity of units and the liquidity of underlying assets, but is still problematic for many funds particularly if the platform architecture for retail investors cannot accommodate this. It is disappointing that the FCA again want a one-size-fits-all solution that does not give the retail investor greater choice.”
Forbes added that the issue for funds in being able to meet the demands of redemptions was not always a liquidity issue and that during the coronavirus pandemic this has instead been a valuations issue, which a notice period – even of up to six months – would not be able to solve.
The FCA’s new proposals – which can be read in full here – are open for consultation until 3 November.
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