The proposals aim to prevent a rush on real estate fund cash reserves by correcting a “liquidity mismatch” between the speed with which investors can request their repayment and the time it takes for fund managers to settle the sale of property to. repay them.
This mismatch has led to a number of fund suspensions in recent years following downturns in the UK commercial real estate market, notably following the Brexit vote and during the Covid-19 pandemic. The regulator said existing rules can lead to a scramble for funds, putting consumers’ money at risk.
“The FCA is concerned that the current structure may put some investors at a disadvantage as it prompts them to be the first to exit in times of stress,” the watchdog said. “This can potentially harm those who remain if the fund goes on hold or assets are sold quickly due to demands for liquidity.”
M & G’s UK real estate fund – which was previously worth £ 2.5bn – was forced to ban customer withdrawals in December 2019 after an increase in buybacks by investors worried about Brexit and the retail slowdown .
Other fund suspensions – notably by Standard Life Aberdeen, Aviva Investors and Legal & General – followed in February and March as the Covid-19 crisis took hold. Eight UK real estate funds are still on hold, including Columbia Threadneedle, Janus Henderson and Kames, according to Interactive Investor.
Similar issues plagued investment funds previously managed by former stock picker Neil Woodford.
Woodford’s flagship fund was first suspended in June 2019 because it was unable to track client redemptions due to the amount of unlisted and harder-to-sell assets in the portfolio. The fund is in the process of liquidation.
Christopher Woolard, Acting CEO of FCA, said: “We believe our proposals will help further our goal of protecting consumers by reducing the number of fund suspensions, avoiding inappropriate fund purchases and increasing the product effectiveness for fund managers.
“We hope that the proposed new rules will directly address the liquidity mismatch of these funds, making them more resilient during times of stress and allowing them to operate in such a way that all investors are treated equally. “