Six-month wait for property fund cash

Published by The Times, 4th August 2020

Investors in commercial property funds should have to wait up to six months to redeem their investments, the City regulator has proposed.

The Financial Conduct Authority said that the pause of up to 180 days would help all investors to be treated equally in property panics and would allow funds to avoid holding such large cash balances.

The £12.5 billion industry has been embarrassed on three occasions in the past 12 years as funds were forced to shut temporarily, trapping investors who wanted to redeem. Most open-ended property funds are gated at present because of valuation difficulties brought on by the pandemic.

The regulator said that it wanted to tackle the so-called liquidity mismatch problem of funds offering daily redemption to end-investors, while investing in illiquid assets that could take months to sell.

In the past, the solution has been to suspend funds, but that policy has encouraged people to flee for the exit at the first sign of stress, leaving other investors disadvantaged as funds are forced to dispose of their shopping centres or office blocks at fire-sale prices.

A breathing space would give funds more time to secure a good price for assets being sold. It also would enable funds to hold less precautionary cash, which can dampen returns when property values are rising.

One drawback might be that property funds could no longer be held in share Isas, favoured by millions of private investors. The FCA said that it was consulting with the Treasury and HM Revenue & Customs.

The FCA said it was proposing that every open-ended fund set a notice period of between 90 and 180 days for redemption requests. Fund-holders requesting a redemption would be committed to selling, but would not know the price until the end of the notice period. The rules would apply to existing funds and to new ones.

Some described the crackdown as draconian and said that it would put off end investors and their advisers.

Charles Incledon, client director at Bowmore Asset Management, said: “If these rule changes are made, then a lot of financial advisers will just stop recommending open-ended property funds to their private clients.”

The proposals are out for consultation until November 3.

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