Property  

Property funds at risk of liquidation as 'perfect storm' hits

Property funds at risk of liquidation as 'perfect storm' hits

Proposed rules requiring investors to give notice to receive their cash from property funds are adding to a perfect storm that puts property funds at risk, specialists have warned.

Investment analysts have predicted the notice period proposed by the Financial Conduct Authority, which could be up to 180 days, combined with a coronavirus-induced economic slump, already suspended portfolios, and the uncertain fate of many office and High Street buildings, could result in the end of open-ended property funds.

Tom Becket, chief investment officer at Psigma, said: “The perfect storm is here for these funds.

“It’s the combination of hard-to-sell assets, economic uncertainty, Covid-19 putting pressure on property usage, and then mixed with the rules.”

All ‘bricks and mortar’ open-ended property funds available to retail investors were suspended in the first quarter of 2020. The swathe of closures arose because valuers deemed it impossible to value the property owned by the funds with the same degree of certainty as would otherwise be the case.

But Mr Becket said if the proposed rules went ahead – potentially making the portfolios impractical for a large number of investors – the ability to reopen funds “may be taken away” and the portfolios “may never reopen”.

He said: “If the funds need to treat investors fairly, but there’s likely to be a rush of assets and effectively forced sales that put other investors at risk, opening may not be permissible.”

Commentators have already forecast the rule change would “spell the end” for retail investors in open-ended property portfolios, as the hefty wait could make advisers question the appropriateness of the products for standard investors.

It could also make it “impossible” to hold property funds for the majority of clients, Mr Becket warned.

Mr Becket added the funds could see a flood of investors leaving, as it was likely people would change their views on the practicalities of holding such assets.

James Calder, research director at City Asset Management, agreed. He has predicted a mass exodus of investors from the open-ended funds once they reopen, as “nobody wants to be the last person standing at the party when all the chairs have gone” and the new rules could be the “final push”.

Mr Calder said some asset managers would try to convert their assets into a closed-ended structure, but warned it was “more likely” most would decide to “close the fund down in an orderly manner so each investor was in the same boat”.

He added: “Whatever way you cut it, the choice for investors becomes more limited and property becomes an asset class for more skilled investors.”

But Ben Seager-Scott, head of multi-asset funds at Tilney, was less pessimistic about the outlook for the sector.

Although he thought the proposals could “put off” many retail investors, they could also spike interest from institutional investors with longer timeframes who could “tolerate the illiquidity much better”.