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FCA to set new rules for property fund redemptions

4 August 2020

The Financial Conduct Authority has launched a new consultation to address the liquidity mismatch in authorised open-ended property funds. 

Currently, property fund investors can buy and sell units on a daily basis, however, the underlying asset cannot be bought and sold in the same way. If too many investors redeem their investments simultaneously, a fund manager may be forced to suspend dealings in the fund.

While fund suspensions are designed to protect investors, repeated suspensions suggest that daily liquidity that property funds offer “cannot always be delivered” and investors may lose confidence that they will be treated fairly, the FCA warned.

To reduce the potential harm, the watchdog has proposed a new notice period for withdrawals, with investors required to give between 90 and 180 days before their investment can be redeemed.

Ryan Hughes, head of active portfolios, AJ Bell, called the decision to introduce a notice period “eminently sensible”.

Hughes said: “It will ensure that property fund managers can manage their portfolios more effectively and give them time to sell properties in a controlled way in order to meet redemptions. Perhaps more importantly it should also change the way investors view property funds. Property should be seen as a long-term investment but daily trading on these funds has led to investors assuming they can get their money back whenever they want whereas in reality this has not been the case in many instances.

“Notice periods won’t call a halt to all property fund suspensions because in times of severe market stress property managers still might not be able to sell properties quickly enough and there will still be the requirement from 30 September this year to suspend funds when there is uncertainty over the values of more than 20% of the portfolio. However, it would give managers greater flexibility to meet redemption requests and should change investor’s perceptions of what to expect.”

The Association of Investment Companies (AIC) also welcomed the move to implement a notice period, but questioned whether the time period would be effective.

Ian Sayer, chief executive, AIC, said: “Today proposals are a step in the right direction. However, the arbitrary 90/180 day period means that this will only help to reduce the problems arising from liquidity mismatches, not seek to eliminate them.  The FCA acknowledges this and suggests that managers might want to set longer periods.

“However, in a world where daily redemption for open-ended property funds is the norm, how realistic is this. Would it not be better to set the notice period at a year, as they do in Germany, where the sector is flourishing, but allow managers to reduce it when they can certify that this is appropriate.”

Property fund suspensions have occurred more frequently since the start of the year, prompted by market uncertainty caused by the Covid-19 pandemic. In March, the Kames Property Income Fund, the Janus Henderson UK Property PAIF and the Aviva UK Property Income Fund were all suspended.

However, Adrian Lowcock, head of personal investing, Willis Owen, warned that the FCA’s proposed intervention would likely hamper interest in the sector going forward.

Lowcock said: “There is no doubt by putting a six-month notice on the funds they will become unappealing to many investors, especially in a time when investors are used to being able to access a growing range of investments with daily liquidity.

“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.

“There will be some disruption, but there are alternatives and the change should present an opportunity for Investment Trusts and Exchange Traded Funds to come up with a proposition that works.”

The FCA consultation will be open until 3 November, with a final policy statement and handbook rules expected in 2021.

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