Investors could find themselves unable to access their cash from open-ended property funds for up to 180 days under proposals floated by the City watchdog.
In a 72-page consultation paper published today (August 3), the Financial Conduct Authority 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.
To move some way towards rectifying this, the regulator has proposed rules which would require investors to give notice — potentially of up to 180 days — before their investment is redeemed.
The FCA said 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.
Under the new rules, each investor’s redemption request would be received and recorded, then processed at the end of a notice period.
Similarly to the current withdrawal process, the price the investor receives will be based on the value of their investment at the first valuation point following the end of their notice period.
Therefore, the investor will not know the precise value they will get until the next valuation point, potentially more than 180 days after they have decided to withdraw their cash.
Redemption requests would be irrevocable — investors cannot withdraw them before the end of the notice periods — and the way funds accept investors’ subscriptions will not change.
The FCA said: “...A daily dealing [property] fund would operate somewhat similarly to a deposit account with a notice period. Specifically, money can be deposited in these accounts on any working day, but when investors wish to obtain their money back they must wait for a set period.
“The main difference in property funds would be that the investor would have to wait a period of time until they knew the price at which they would redeem.”
Although the move would mean redeeming investors would be subject to greater ‘market risk’ than they are now, the FCA said this was a “fair way to balance the interests of all investors” in property funds.
In order to determine the length of the notice period, the City watchdog said it had considered the time taken to sell commercial property, the time horizon in which a consumer may look ahead to when planning their financial affairs and the level of market risk to the investor.
The FCA noted a period of 90 days was likely to be acceptable for consumers to plan their financial affairs, whereas 180 days could provide more time to sell property at the best price but may be disadvantageous to consumers. It said it welcomed views on both options.
Any changes will also apply to non-Ucits retail schemes (Nurs) that invest 50 per cent or more of their assets in immovables and any fund where those limited redemption arrangements provide for dealing in units more frequently than the length of the notice period.