FCA’s 180-day rule ‘spells the end’ for property funds

Published by FT Adviser, 3rd August 2020

Warning bells have been sounded that the City watchdog’s proposals to enforce a 180-day notice period for open-ended property funds could “spell the end” for retail investors in property portfolios.

Earlier today (August 3) the Financial Conduct Authority published a consultation paper floating rules which would require investors to give notice — potentially up to 180 days — before their investment is redeemed from an open-ended property fund.

The FCA said there was a “liquidity mismatch” between the underlying property held in such funds and the daily basis in which investors bought and sold units and that the notice period would allow the fund manager to plan sales of property assets so it could better meet redemptions that are requested.

It would also enable greater efficiency within the funds as managers would be able to allocate more of the fund to property and less to a cash buffer to meet redemptions, the regulator added.

But experts have argued the hefty wait could make advisers question the appropriateness of the products for retail investors while also making it “impossible” to hold property funds for the majority of clients.

Trouble for advisers

Mike Barrett, consultant at the Lang Cat, said: “[The rules] could well spell the end for open-ended property funds being used by anything other than a small minority of advised clients.

“Some 82 per cent of advice firms run a centralised investment proposition of some form…and the fact these solutions are held by more than one client means it becomes impossible to hold property funds, as individual clients will disinvest at different times.”

Mr Barrett said this would result in property funds only being used on a “bespoke basis” and the expected return would need to warrant the additional risks and complexity introduced.

A source from a large advice firm, who did not want to be named, agreed, saying it was likely the rules would make property an asset class that was “only wanted by the most sophisticated investor” such as those willing to invest in private equity directly.

Similarly, Alan Lakey, director at Highclere Financial, thought an 180-day notice period would make life “very difficult” for advisers, saying it was likely they would be “reluctant to consider property”, especially for clients who thought liquidity was important.

Client director at Bowmore Asset Management, Charles Incledon, agreed. He said: “A lot of financial advisers will just stop recommending open-ended property funds to their clients.

“This will make it harder for those investors to diversify their portfolios.”

The FCA’s propert fund proposals 

The FCA is proposing rules which would require investors to give notice, potentially up 180 days, before their investment is redeemed.

Unappealing choice

Others thought the rules would simply make investing in open-ended property funds unattractive to most investors.

Adrian Lowcock, head of personal investing at Willis Owen, said: “There is no doubt by putting a six-month notice on the funds they will become unappealing to many investors, especially in a time when investors are used to being able to access a growing range of investments with daily liquidity.

“Six months is a long time for any investment and the price you get 180 days later could be materially different from the one you expected.”

Paul Stocks, financial services director at Dobson and Hodge, agreed. He said having a waiting period as an expectation of a property fund — rather than a risk of suspension as it currently is — would “reduce popularity”.

He added: “Combine that with the fact you won’t know the value expected at the end, and it is highly likely to see their use reduce even more.”

Potential positives

Experts did say there were some positives to draw from the FCA’s proposals, however.

Darius McDermott, managing director at FundCalibre, said the rules would be a “good result” if they stopped “hot money” from going in and out of the property asset class and investors will instead have to decide if they want to invest in property for the long term.

He added: “If investors don’t want to tie their money up they always have the option of an investment trust and then just stomach the discount if the asset class is out of favour when they want or need the money.

“There are options – investors just need to understand what they want from an investment and choose accordingly.”

Meanwhile Alan Chan, director at IFS Wealth and Pensions, thought open-ended property funds would still have a role to play for the average retail investor, providing it was kept to a “small portion” for liquidity reasons.

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