The Financial Conduct Authority, the UK’s regulator of financial services firms and markets, has published potential new rules for open-ended property funds that propose a mandatory 90-day notice period for investors withdrawing money.
The proposals apply to all open-ended funds holding what the FCA terms “inherently illiquid assets”, such as property and infrastructure, and aim to prevent widespread suspensions of withdrawals and fire sales during periods of economic turmoil.
The UK open-ended real estate funds uniformly gated as the national lockdown took hold at the outset of the pandemic in March 2020, in response to the Royal Institution of Chartered Surveyors’ recommendation that material valuation uncertainty clauses be applied across UK real estate. That ultimately led to property fire sales and a major scaling back in the number of funds and size of the UK open-ended market.
The Bank of England and FCA have since been pursuing major reviews of UK open-ended real estate funds to tackle the “liquidity mismatch” between daily trading and the ability to sell real estate in difficult market conditions. During this process, the FCA had suggested there should be an up to 180-day delay on redemption requests.
Speaking to CoStar News, John Forbes, from John Forbes Consulting, a leading expert on UK real estate finance, tax and funds, said: “It is disappointing that after 10 years we still have something that may not be workable in practice. Although some concerns have been addressed in the various consultations, there are points that have not been addressed. This is another consultation so there may be opportunity for further changes.”
In a statement on Thursday, the FCA said its proposals provided clearer expectations for asset managers about long-term investments, such as property, giving the market more confidence to invest in funds that support private markets.
The FCA writes: “The new rules mean that investors will have to give 90 days’ notice to access their funds but will be more certain that they will receive their money. For investors, this means the fund should be clearer from the start about how quickly they can get their money back and whether the fund is right for their needs.”
At present some of the funds allow people to take money out daily with no notice period but during periods of stress or volatility funds often suspend all payments due to lack of available cash. The FCA says some funds are also holding extra cash, leaving less invested in their intended assets. That can lead to rushed sales that can can lower prices, harm investors who stay invested and put pressure on markets, the FCA adds.
The FCA says the new notice period would give managers time to sell assets in an orderly way and make liquidity-driven suspensions less likely.
Existing funds would have two years to comply and give investors at least one year’s notice.
The proposals are intended to bring the UK into line with new international liquidity standards for open-ended funds.
Michelle Beck, director, markets, at the FCA, said in a statement: “Funds should be clear about whether they offer quick access or are built for longer-term investments like property. Our rules will help firms make that clearer and give the market more confidence to invest.”
The FCA is asking for feedback on the proposals by 11 December.
The consultation covers authorised fund managers of non-UCITS retail schemes, known as NURS. The FCA says fund managers could set a notice period longer than the minimum where the fund’s assets or investment strategy require it.
