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.
I think the remaining investors are likely to be more stable in their flows. -- Ben Seager-ScottJames 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”.
Mr Seager-Scott said: “It generally tends to be more retail flows or hot money that are the marginal trades in these funds and potentially exacerbate suspensions – if these flows leave and don’t come back, even though the sector may be smaller, I think the remaining investors are likely to be more stable in their flows, which is probably a benefit in this situation.”
Consumer behaviour
However, even if investors were keen to stay invested in open-ended property funds, the sector still faces the issue of changing consumer behaviour as a result of the coronavirus crisis.
The Investment Association’s UK Direct Property sector is heavily exposed to areas of property potentially at risk as consumers avoid shops and workers plan for a ‘new normal’ in terms of office workers.
As of July 31, nearly 40 per cent of the sector’s holdings were in offices, retail spaces or shops.
Jake Moeller, senior investment consultant at Square Mile, said: “UK commercial property faces a perfect storm of challenges; technological disruption, Covid-19 and Brexit all aligning to undermine tenancies and rents.”
However, Mr Moeller maintained it was an “important asset class” which was appropriate for investors with longer-term horizons.
An FCA spokesperson said: “This is an open consultation which proposes a period of between 90 and 180 days. We welcome feedback on the relative merits of these different options, and have also invited suggestions for alternative measures that might achieve the same outcome.”
In its consultation, the regulator said there was a “liquidity mismatch” between daily dealing and the underlying property held in such funds, claiming the notice period would allow the manager to plan sales of assets to better meet redemptions.
The change 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 FCA said.
imogen.tew@ft.com
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