Many investors will be aware, through bitter experience, that open-ended property funds are currently gated, or closed to redemptions and new investment.
So, what does this experience mean for the future, what can we learn and what is the risk of gating in other investment areas?
The concept of gating, with respect to open-ended investment companies and unit trusts, first came into focus during the credit crunch in 2008.
At the time of the Lehman Brothers’ collapse, there was a sudden stampede for the door as cash became king and those funds invested in illiquid assets, such as commercial property, quickly ran out of cash.
The authorised corporate directors, who oversee the transactional activity, implemented their suspension clauses to protect remaining unit holders, which subsequently stopped all further transactional activity.
- Many property funds are gated
- Covid-19 has prompted many big companies to rethink their office space
- The more exotic an asset is, the less liquid it is likely to be
For many investors it was a big wake-up call. As the credit crunch thawed, the funds re-opened and investors realised that the attractions of commercial property remained as a recovery play and the demand for redemptions quickly dissipated.
Consequently, nothing changed, while investors had another wake-up call when the Brexit vote returned a ‘leave’ result on June 23 2016.
Investors concluded that commercial property would be one sector particularly affected and many rushed for the door. Round two of fund suspensions occurred once more.
There was widespread condemnation within the media from marooned investors, with many complaining that nothing had changed since the credit crunch, despite the obvious conflict between having daily dealing within funds that have predominantly illiquid underlying assets.
This remains the case today. There is no distinction in place for an investor with regard to the liquidity of the underlying assets within one retail open-ended, daily dealing Oeic/unit trust and another.
There is no requirement for the promoter, ACD or fund manager to make the investor aware when this could be the case and no requirement to declare that there is a risk that, during a major market set-back, an investor may end up holding a suspended investment where they cannot get their money back on demand.
Covid-19 has cruelly exposed this conflict once more where most bricks and mortar commercial property funds are currently suspended and there is no certainty as to when they may reopen.
What is worse this time around is that the asset class is unlikely to experience the usual recovery in tandem with economic conditions.
The virus has brought about a huge change in corporate thinking with regard to remote working and the need to occupy expensive offices in city centres.
This means that when these property funds do reopen, there is likely to be a significant mark down in the value of the assets, whenever the valuers can be assured of what the value is, given the likelihood of reduced demand and a probable reduction in development expenditure.
It could be some months before this becomes clearer.