The Financial Conduct Authority (FCA) is now carrying out a consultation exercise on proposals to reduce the potential for harm to property fund investors caused by “the liquidity mismatch in open-ended property funds.”

The proposed new rules would require investors to give notice of potentially of up to 180 days to redeem their investment.

The FCA says it welcomes any feedback about the issue and is “particularly keen to hear suggestions for alternative measures that might achieve the same outcome.”

Currently open-ended property funds are often structured so that investors can buy and sell units on a daily basis. But the underlying property investments are illiquid; they cannot be sold quickly if large numbers of investors “run for the exit”, so unless there is sufficient cash in the fund, payouts must be limited.

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This situation creates a “liquidity mismatch” in which the fund manager may need to suspend dealings in the units of the fund when there is insufficient cash available.

Large property investments can take months and even years to sell and this illiquid nature of property also means that an optimum price is not always readily available. Being forced into “fire sales” when market conditions are against the fund means that the full market value of the properties may not be achievable.

Over recent times property fund suspensions have occurred with increasing regularity, including the great recession of 2008, Brexit and now the coronavirus pandemic.

The funds are suspended to protect the interests of all the investors only in exceptional circumstances: panics and market downturns. But the FCA is concerned that the current structure can disadvantage some investors. It means that there is always an incentive to “get out quickly” at the first sign of trouble, which means that those investors remaining in the fund can end up taking the biggest hit.

The proposed notice period would allow fund managers to plan for sales of property assets so that it can better meet redemptions. It would also enable greater efficiency within these products says FCA, as fund managers would be able to allocate more of the fund to property and less to cash for unanticipated redemptions.

Christopher Woolard, Interim Chief Executive of the FCA, says:

‘We think that 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.’

The FCA is to publish a Policy Statement with the final rules on redemptions as early as possible in 2021.

The consultation will remain open to responses until 3 November 2020.

Consultation – Liquidity mismatch in authorised open-ended property funds

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