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.