Investors to give six months’ notice for property fund redemptions
The Financial Conduct Authority (FCA) has launched a consultation and proposed rules to require investors to give notice of between 90 and 180 days before their investment is redeemed.
It said it wants to reduce the potential harm to investors from the “liquidity mismatch” in open-ended property funds and comes after a number of these funds suspended dealing in the aftermath of the Brexit vote and due to the coronavirus pandemic.
Currently, investors in open-ended funds can buy and sell units on a frequent basis, which can be daily. But the underlying property in which these funds invest can’t be bought and sold at the same frequency. They’re illiquid which means it takes time to sell commercial property such as office blocks and warehouses, for instance.
While fund managers hold large cash buffers to protect investors at times when there are more sellers than buyers, this “liquidity mismatch” means when redemptions are high, a fund manager can suspend dealing to protect investors.
But because of the number of fund suspensions in recent times due to liquidity issues, the FCA said it there may be “wider problems”.
Its consultation document stated: “The FCA is concerned that the current structure could disadvantage some investors because it incentivises investors to be the first to exit at times of stress. This can potentially harm those who remain if the fund suspends or assets are sold rapidly due to liquidity demands.”
It added that the illiquid nature of property also means a reliable price is not always readily available, and in some market conditions the fund units can’t be priced with confidence.
The proposed notice period would allow the manager to plan sales of property assets so that it could better meet redemptions. 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.
‘Treating investors equally’
Christopher Woolard, interim chief executive of the FCA, said: “We think our proposals will help further our consumer protection objective by reducing the number of fund suspensions, preventing unsuitable purchases of funds, and by increasing product efficiency for fund managers.
“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.”
‘Proposals eminently sensible’
Ryan Hughes, head of active portfolios at AJ Bell, said there is currently over £12.5bn of investors’ savings trapped in open-ended property funds that are suspended.
Hughes said: “The FCA’s proposal to introduce a notice period for withdrawals from open-ended property funds is eminently sensible. 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. Having a notice period of between 90 and 180 days should change this perception and means investors are less likely to get a nasty surprise when they want to withdraw their savings.
He added that notice periods won’t call a halt to all property fund suspensions, however.
“This is 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 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,” he said.
The consultation runs until 3 November and the FCA will publish final rules as soon as possible in 2021.
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