Investors in open-ended property funds may have to give 180 days’ notice to withdraw their money under plans put forward by the Financial Conduct Authority in a bid to improve liquidity in the sector.
The regulator’s interim chief executive Christopher Woolard flagged up sweeping changes to the structure of these funds in early July as a way of tackling the sector’s “liquidity mismatch”.
Currently, 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 – and the problem of how to value these assets has been acutely felt with offices, shopping centres and restaurants shut for a big chunk of this year.
As a result, the majority of property funds remain closed to new investors and existing investors wishing to sell, since gating in March at the height of the coronavirus crisis. M&G Property, the sector’s second-largest fund, is still closed to investors after suspending in December. Many of these funds also suspended after the Brexit vote.
“Fund suspensions exist to protect investors in exceptional circumstances. However, the FCA has seen repeated suspensions of these funds over recent years for liquidity reasons, which suggests that there may be wider problems,” the regulator said.
The proposed 180-day rule is designed to put a stop to any “rush for the exits” when a fund hits turbulence. Under the current system of daily dealing, investors who are quickest to redeem have an advantage over those who want to remain, the regulator says.
Adrian Lowcock, head of personal investing at Willis Owen, says a change such as this would put off many investors from considering the sector: “Six months is a long time for any investment and the price you get 180 days later could be materially different from the one you expected. However, the notice period will help remove short term investors and would make the asset class less volatile and less susceptible to sell-offs," he says.
Cash Buffers
The FCA says the proposed notice period would allow the manager to plan sales of property assets so that it could better meet redemptions that are requested. "It would also enable greater efficiency within these products as fund managers would be able to allocate more of the fund to property and less to cash for unanticipated redemptions,” it added.
Holding a large cash buffers is a common tactic used by property funds but it can be a drag on returns. Our analysis found that funds have held, in some cases, up to 30% of their assets in cash which means less investor money is being put to work. Of course, in times of crisis a big cash buffer is seen as a prudent measure to keep a fund afloat.
As the Woodford saga highlighted only too clearly, investors wanting to get their money back from illiquid and hard-to-sell assets may have to accept lower valuations and face long delays.
While the re-opening of parts of the economy means has eased some of the pressure on commercial property, there is little doubt of the challenges facing the sector. Lloyds Banking Group (LLOY) has forecast a 20% fall in commercial property prices this year – which is worse than the forecast it made three months ago at the height of the crisis – and warns that in a worst-case scenario, values could fall by as much as 36%. Surveyors asked by industry body RICS say they are as gloomy now about the retail and office sector as they were during the 2008 financial crisis.
The FCA is asking for responses to its consultation by November 3 with the new rules expected to come into place in 2021. It is open to alternative ways, other than imposing a 180-day rule, that can solve the current problem.
