The UK property funds trade body’s chief executive says there should be a review of how the sector works
John Cartwright told Financial News that one option could be to introduce a tiered structure where investors are charged according to how quickly they want to withdraw their funds.
He said: “It’s the quantum of the flows that raises the issue. When you have got a significant amount of redemption requests, it puts the manager in a position of having to sell in a relatively short period of time and that’s when you get the mismatch.
“They [the funds] have done what they have been designed to do – but nonetheless that’s not an argument for not looking at them afresh.”
There are a variety of property fund structures, but the recent suspensions were all of open-ended funds. These vehicles give investors a daily opportunity to demand their cash, causing problems if many head for the exit at the same time as funds can take weeks or months to sell assets.
The funds had to suspend trading after retail investors took a dim view of the prospects for real estate following the UK’s vote to leave the EU, which triggered a wave of moves, stirring memories of the financial crisis when a number of similar funds were also suspended.
Over half of the 10 biggest funds managing UK commercial property investments have been shuttered in recent days.
Cartwright said Aref would “support a review in the cold light of day with a proper assessment” of how the funds should function in future. He said: “We intend to do that with our members and also to talk to the regulator about it. It’s the right thing to do. I’m not saying tear the whole thing up, there’s a structure in place, [but] can we make additions to make [the funds] better?”
Andrew Bailey, chief executive of the Financial Conduct Authority, said on July 5 that there could be a need to review the structure of these funds. The same day Bank of England Governor Mark Carney said there was a “liquidity mismatch” around these fund structures and mechanisms to manage outflows. The FCA has declined to comment beyond Bailey’s comments.
Manish Chande, a senior partner at real estate fund manager Clearbell Capital, which has more than £1 billion in assets under management, said: “The FCA do definitely need to be active [in looking at these funds]. I am surprised that the model has been allowed to continue. The regulator should have taken a slightly different line on this post the global financial crisis.”
Chande added that funds should be required to hold a cash buffer to protect themselves in the event of a run on their funds, similar to that imposed on UK banks in the wake of the financial crisis. He also said investors should be subject to a mandatory haircut if they do demand an immediate redemption, to discourage them from doing so and creating a run on the fund.
Echoing Cartwright, Adrian Benedict, investment director, real estate at Fidelity International, said a solution would be to change the liquidity window of the funds from daily to quarterly, or even semi-annually. He added: “I’m not sure what demand levels might be but it would be markedly lower than for a daily dealt fund.”
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