The Financial Conduct Authority is to look again at open-ended property funds amid ongoing concerns over whether they are the right vehicle for holding illiquid assets like shopping centres and office blocks.
The FCA’s chief interim chief executive Christopher Woolard says the regulator will consult on the so-called “liquidity mismatch” issue later in the summer. It will look at whether “these funds could safely transition to a structure in which liquidity promises to investors are better aligned with the liquidity of fund assets”.
Property funds are required to provide daily pricing to investors, and allow people to buy and sell whenever they like. However, the buildings owned by these funds cannot be offloaded as easily as shares; it can take many months to offload a building worth tens of millions of pounds.
Economic uncertainty also creates further problems for these funds, particularly when independent valuers feel unable to put a price tag on the properties the funds own. At times of uncertainty or to stem outflows, funds can suspend trading, meaning investors cannot buy or sell. Almost all open-ended property funds are still suspended after gating in March, while M&G Property, the sector’s second-largest fund, is still closed to investors after suspending in December
“While suspension is in the best interest of investors, this crisis, like the aftermath of the Brexit referendum, shows the difficulty for these funds of maintaining a promise of daily liquidity to investors when their assets are inherently illiquid,” says Woolard.
Adrian Lowcock, head of personal investing at Willis Owen, believes a consultation on these funds is a vital step forward that will help rebuild trust in the fund industry.
"The events of the past twelve months have made it all too clear that something needs to be done, and it is a real step forward that the FCA is talking so openly about ensuring these open-ended property funds are converted into better structures,” he says. “For investors, this change will provide a much more suitable investment for them, and change can't come soon enough."
Philip Hanley, IFA at Philip James Financial Services, says he's always been wary of property funds because "time and time again, prices have tumbled and the doors have been shut and what's looked too good to be true has proven to be so".
To stop these problems recurring, he recommends a proper review of these funds and perhaps restrictions on retail investors owning them altogether.
Property Funds Still Suspended
Open-ended funds gated in the aftermath of the Brexit vote in 2016, re-opened as volatility eased, but shuttered again in March 2020 as the UK went into lockdown. With offices, shops and restaurants closing, independent property experts were unable to value the funds' assets properly, triggering a wave of suspensions.
M&G Property had already suspended in December 2019 just days before the General Election, and the fund company blamed “unusually high and sustained outflows” amid Brexit uncertainty and the UK retail sector’s woes. Without enough cash on hand to meet a wave of investor redemptions, funds gate to avoid being forced into a firesale of their assets.
In June this year, BMO Property Growth & Income re-opened to investors, but the fund is mainly invested in property company shares, which are more inherently more liquid. With many commercial property assets such as shops, restaurants and offices now open again, most have had their “material uncertainty clauses” lifted and in theory many open-ended funds could come out of suspension this year.
The regulator has been planning to tighten up rules on how these funds are marketed and how liquidity is managed. A new category was set to be created this year, “funds investing in inherently illiquid assets (FIIA)”, to ensure the regulator keeps a closer eye on the sector. The FCA and Bank of England were due to publish a report earlier this year on the issue, but that has been delayed by the coronavirus crisis.
