Advisers will need to “review and reassess” the role of property funds within their centralised investment propositions as a “real conflict” brews between the regulator’s proposals and how advice firms manage money.
Speaking on the FTAdviser webinar, Mike Barrett, consulting director at the Lang Cat, said the Financial Conduct Authority’s proposed changes to open-ended property fund rules meant advisers would need to review their CIPs to consider “where property fits into that”.
He said: “The most important thing for advisers is the target client you’re serving and looking to serve through different segments.
“The current debate around property amplifies that even more. You could make the argument that property funds are more suitable for the accumulation stage […] however if you’re at retirement, the ability to make withdrawals and manage it on a bulk basis is important.”
Mr Barrett was discussing the FCA’s proposed regulations for open-ended property funds with Ryan Hughes, head of active portfolios at AJ Bell. The full webinar is available here.
Mr Hughes said the City watchdog was “going down the right approach” with the proposals given the fact open-ended property funds had been suspended multiple times over the past few years.
He said: “Trying to tell investors they cannot have their money back is a difficult message to give.
“Every time a fund suspends, ultimately you are undermining investor confidence in our industry, and surely it is in all of our interests to do the right thing and address the problem so we don’t push investors into unregulated investments.
“We all have a duty, so in tackling this thorny issue, the FCA is going down the right approach.”
Mr Barrett said the FCA’s proposals, which showed they wanted more involvement with the end investor, were in “real conflict” with how most advice firms managed money.
Recent research from the Lang Cat showed 82 per cent of advisers ran some sort of CIP, while the majority of firms outsourced their money management to a third party — a DFM, a multi-manager or a packaged range.
It was also rare for firms to adopt one type of solution for investment management and they would often use different solutions for different client segments.
Mr Barrett said: “There’s a real conflict. The FCA wants more involvement with the individual and the individual circumstances and when the individual wants to withdraw.
“However, two thirds of the market are outsourcing that decision to third parties. So it’s a really confusing area, and difficult to see how these scenarios will be rectified.”
But advisers are unlikely to be happy to remove property from their clients' portfolios completely.
Mr Hughes said property had played an important part in the majority of diversified portfolios over the past few decades.
He said: "The key factor to why commercial property is popular and is such a key part of people's portfolios is the correlation of the asset class against other benchmarks.
"It brings diversification into the portfolio and has a key role to play."
The problem
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.
In the aftermath of the EU referendum in June 2016, funds were forced to gate due to liquidity issues following a rush of withdrawals.
In a consultation published last month (August 3), the regulator said there was a “liquidity mismatch” between the underlying property held in such funds and the daily basis on which investors bought and sold units.
To move some way towards rectifying this, the regulator has proposed rules that would require investors to give notice – potentially of up to 180 days – before their investment is redeemed.
Commentators have forecast the rule change could “spell the end” for retail investors in open-ended property portfolios while some investment analysts warned the proposed rules were adding to a perfect storm that put property funds at risk of liquidation.
Others have argued that investors wanting property exposure will “inevitably pivot” towards real estate investment trusts.
imogen.tew@ft.com
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