FCA mulls measures to prevent repeat of property fund freeze-up


Standard Life Investments last week became the latest manager to reveal plans to reopen a UK property fund

The UK regulator has started meeting asset managers after a spate of funds managed by the likes of Standard Life Investments, M&G Investments and Aberdeen Asset Management were forced to suspend redemptions following the June 23 vote to leave the European Union.

Ideas mooted in discussions with the UK’s £25 billion industry, which invests directly in slow-to-sell bricks and mortar but largely promises investors their money back daily, include the division of property unit trusts into two. One sector would comprise funds with a 20% allocation to cash and liquid securities and daily liquidity. The other would allow 100% allocations to property but protect against waves of redemptions by offering monthly, or quarterly, redemption periods.

Another idea involves the publication of separate fire-sale and open market valuations by separate firms of surveyors. There have also been suggestions of converting open-ended funds into closed-end real estate investment trusts, according to people close to the talks.

The FCA declined to comment.

Almost three quarters of the sector was forced to halt trading in the property unit trusts following the UK’s Leave vote, as investors exited the funds amid fears that buyers for UK real estate would evaporate. Despite keeping a cash buffer funds were unable to sell property quickly enough to meet investor demands and had to suspend redemptions.

David Paine, head of real estate investments at Standard Life Investments, which plans to reopen its own £2.5 billion property fund in the fourth quarter, said the FCA could look at the “consistency of actions by different managers” during the period of suspensions. He added: “Different managers have taken different approaches to the challenges that were faced, and I think there will be a look back to say ‘was there a better way of handling this’?”

Standard Life Investments and others plan to maintain daily dealings.

Some market participants said managers, and regulators, failed to learn lessons from the past. In 2008 investors were denied access to their cash in the New Star International Property fund when the group decided to suspend trading during the credit crisis.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said a “fundamental problem” with investing in these funds “has not gone away”: He said: “Liquidity concerns will continue to hinder the investment strategy of funds in the sector and prompt managers to hold high levels of cash, so a fair whack of investors’ capital will be returning next to nothing.”

Robert Jenkins, former chairman of the Investment Association, now senior fellow at financial lobby group Better Markets, said an outright ban on property funds offering same-day liquidity should be enforced. “Mis-alignment of redemption terms and conditions with the liquidity of fund’s holding and strategy was a lesson learnt in 2009 by the hedge fund industry. Applying the lesson to the broader investment industry is long overdue.”

Pascal Duval, Russell Investments’ chief executive for Europe, added: “Everyone knows that property is an illiquid asset class – why create an illusion of liquidity then?”

The FCA is not the only watchdog looking at the issue. The Financial Stability Board, chaired by Bank of England governor Mark Carney, has expressed concern over funds that invest in potentially illiquid assets, but offer daily liquidity. In a consultation document in June, it said: “The relevant authorities could consider requiring that the fund impose restrictions on redemptions, offer less frequent redemptions or be organised as a closed-end fund.”

Some are not convinced of the need for significant changes.

John Cartwright, chief executive of the Association of Real Estate Funds, which has hired an external consultant to conduct an independent review of the fund structures, insisted that the “model is not broken”. He said the suspension mechanisms did what they were intended to do, allowing fund managers to avoid property fire sales, which would have further harmed investors.

Alan Carter, senior property analyst at broking firm Stifel, believes property unit trusts will always face problems selling property in thin markets, when investors are most likely to redeem. He is doubtful that fire-sale valuations will be reliable. “Listed funds are a far better proposition,” he said.

Marc Haynes, senior vice-president at fund manager Cohen & Steers, also said he backs listed funds but added: “The regulator must address the structural flaws of open-ended direct property funds and implement a ban on daily dealing.”

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