Shares - - MONEY MATTERS -

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.

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