POTENTIAL NEW RULES ON PROPERTY FUNDS
The Financial Conduct Authority, a regulator, has proposed that property funds and other portfolios invested in illiquid assets should be badged as having ‘high liquidity risk’.
Trading in these funds would also have to be closed off as soon as there was ‘material uncertainty’ expressed by an independent third party over the valuation of at least 20% of their assets.
Several property funds suspended trading in July 2016 as investors scrambled to get their cash out amid widespread concern the Brexit vote would severely damage the UK property market. The FCA is looking to avoid a repeat of this situation.
The problems specifically impacted openended funds (unit trusts and Oeics), rather than listed property vehicles, as their size isn’t limited
and varies according to supply and demand. If investors want to sell or redeem their interest in an open-ended fund, then the fund needs to sell assets to meet these redemptions. Investment trusts fall under the category of closed-ended funds.
In 2016 some (but not all) open-ended property funds suspended trading as they wanted to avoid asset fire sales in order to generate the necessary cash to meet a flood of redemption orders from investors.
The problem is that investors want to be able to buy and sell funds whenever they want but the underlying asset class held by these funds doesn’t work this way.
A fund manager trying to sell their interest in an office block, for example, would struggle to achieve a sale in a short timeframe.