UK property funds have lost £2.7bn in net outflows during the past 12 months, an unprecedented run of withdrawals during which the market has been battered by uncertainty over Brexit and political upheaval.
September marked the 12th consecutive month of net outflows from domestic investors in UK real estate funds, according to figures from fund transaction network Calastone. Those numbers come hard on the heels of the Financial Conduct Authority’s publication of tough new rules for funds that trade in illiquid assets.
Property funds saw outflows of £199m in September, Calastone said. Analysts at the company have previously pointed to uncertainty around Brexit and Boris Johnson’s appointment as prime minister as political events that appear to have made investors turn their backs on property funds.
Edward Glyn, Calastone’s head of global markets, told EG ahead of the publication of the September numbers that broader fears over the likelihood of a recession and worries over liquidity had only added to funds’ woes.
“We’ve seen that in the normal mutual fund area but I think that perfect storm is compounded much more in the property sector, where liquidity is even more of an issue,” Glyn said.
“You have the classic symptom whereby if people want their money out, the easiest way to do it for the asset manager is often to sell the stuff that is easiest to sell, which tends to be the good stuff.
“If you’re left as an investor in the fund, you could be left with the properties that are much less desirable than they ones they’ve had to get rid of.”
Material uncertainty
New rules from the FCA are aimed at ensuring investors have “clear and prominent” information on liquidity risks by placing new obligations on open-ended funds that invest in property and other illiquid assets.
The watchdog launched a consultation into the matter after several property funds closed to investor withdrawals in 2016. The “gating” of those funds came in response to a spike in redemptions after the UK’s Brexit vote.
The FCA will introduce a new category of “funds investing in inherently illiquid assets”, or FIIAs, under which funds will have to file increased disclosure on how they are managing liquidity and publish liquidity risk contingency plans.
Shares in such funds will also be suspended if an independent valuer believes that there is “material uncertainty” about the value of more than 20% of a fund’s assets. The rules were published this week and come into effect next September.
Christopher Woolard, the FCA’s executive director of strategy and competition, said: “We want people to continue to be able to invest in illiquid assets, such as real estate, through open-ended funds but it is important that they are appropriately protected.”
Woolard added: “We also want to make it clear that authorised fund managers are responsible for managing the liquidity risk in their funds and acting in the best interests of investors.”
The rules had been expected earlier in the summer but were delayed after the LF Woodford Equity Income Fund, run by once-revered stockpicker Neil Woodford, was suspended owing to a rise in redemptions.
Announcing the new rules, the watchdog said the Woodford fund suspension “underlines the importance of effective liquidity management in open-ended funds more generally”.
More bad news?
Chris Cummings, chief executive of the Investment Association, has called the FCA’s approach “pragmatic and measured”, adding that fund suspension “is not undertaken lightly and acts as an important and sometimes necessary tool to protect investors’ interests”.
Others are more sceptical. David Wise, former manager of the Kames Property Income Fund and a previous chairman of the Association of Real Estate Funds, said: “The new FCA rules are bad news for the open-ended property fund sector and their underlying investors, who are likely to see more fund suspensions as a result of these changes.
“For example, there has been a period of material uncertainty over the valuation of retail assets for much of this year which could have resulted in funds being suspended for most of this year had these rules been in operation.”
Wise added: “The changes are likely to hasten the move of investors away from such funds to listed alternatives.”
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