Real Estate

Property fund managers criticise FCA proposals


Fund managers say that new proposals to make open-ended property funds fairer for retail investors, following mass suspensions amid the Brexit-related sell-off in 2016, could make it harder for investors to withdraw their money.

The Financial Conduct Authority said this week that funds invested in illiquid assets such as commercial property and infrastructure could be forced to halt trading as soon as there was uncertainty about the value of 20 per cent of those portfolios.

The proposal was part of a package designed to protect investors in open-ended funds which ran into difficulties after the 2016 EU referendum when a significant number of investors tried to sell at the same time.

Property funds holding about £15bn of investors’ money suspended trading in the aftermath of the Brexit vote as they struggled to sell buildings quickly enough to fulfil daily redemption requests from investors who wished to sell their units. When trading resumed, fund valuations were depressed by large volumes of properties hitting the market at the same time.

The FCA said this week it was fairer to suspend trading when there was doubt about the value of a fund’s assets rather than “continuing to buy and sell units at a price that may not accurately reflect the fund’s net asset value”.

“The proposals from the FCA will mean that property funds are likely to suspend trading sooner and potentially more frequently than they have in the past,” said Ryan Hughes, head of broker AJ Bell’s active portfolios, adding that “this isn’t necessarily a bad thing”.

He said the rule would make it fairer for investors in property funds by stopping the “first-mover advantage” where one group of investors is able to cash out while others are left stuck in the fund.

Halting trading more quickly could also deter fund managers from selling buildings at heavily distressed prices to meet investor redemption requests, risking triggering a decline in property prices.

In July 2016, Aberdeen Asset Management was forced to write down the value of its property portfolio by more than a quarter after being advised that it would need to accept severely depressed prices to sell property assets within seven days.

“The FCA is trying to reassure the market and say it is OK to suspend and be patient in order to avoid getting fire sale prices for assets,” Mr Hughes said.

However, other fund managers warned that the FCA’s proposals could have the unintended consequence of pushing managers into even more illiquid assets by removing the onus to continue trading.

David Wise, manager of Kames Property Income Fund, said: “Our concern centres around the proposed system making it easier for very large funds to hold very large illiquid assets and effectively not have to provide liquidity, because they can just shut.

“Whilst I would never say that a fund should not shut, I think that should not be the first port of call,” he added. “Funds should be better structured to provide liquidity. We believe that smaller funds holding smaller and more liquid assets is the way forward.”

Adrian Benedict, investment director at Fidelity International, said the new rules could potentially mean property funds would appeal less to retail investors keen to access their money quickly.

“The FCA appears to be saying implicitly that preventing market contagion is more important than providing liquidity to investors,” he said.

“[Currently], if you operate an open-ended vehicle you need to run the strategy in a certain way in order to honour clients’ right to redeem. But with cash yielding close to zero, that is expensive liquidity.

“This [guidance] is now suggesting you can go further down the line in the quest for performance partly at the expense of honouring that liquidity,” he said, adding it would be “interesting to see who ends up buying these funds”.

Danny Cox, chartered financial planner at Hargreaves Lansdown said the new protections were “likely to drive fund managers to hold greater amounts of cash, which will ultimately dilute performance”.

Property fund managers have already increased their cash weightings. The average cash position across 21 major property funds has risen from about 15 per cent immediately before the EU referendum to more than 20 per cent on average today, according to AJ Bell research.

The average fund in the UK Direct Property sector has returned 11.7 per cent since the day of the referendum, according to data provider FE, having recovered initial losses.

The FCA warned this week that managers “should not build up or hold large cash buffers for a long period, merely to deal with the possibility of unanticipated high levels of requests from investors wishing to redeem their units at some point in the future”.

Other measures outlined by the FCA included contingency plans for dealing with liquidity risks and hiring independent depositaries to oversee liquidity risk management.

The regulator also said investors should be made more aware of the risks of investing in open-ended funds invested in illiquid assets like property through better labelling. This mismatch has long been pointed out by the sector’s critics.

“Are open-ended funds the right vehicle to invest in property? No, not really,” said Jason Hollands, managing director at Tilney Group. “These risks need to be flagged to investors.”



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