The Financial Conduct Authority signalled its intention to require property fund investors to give 180 days notice of withdrawal in the future in a statement yesterday. The regulatory said the rule change is designed to tackle the increasing frequency of property fund suspensions. Currently investors in property funds can buy and sell units on a frequent – often daily – basis. However, the FCA says the underlying property in which these funds invest cannot be bought and sold at the same frequency.
Several firms have stated their support of the notice period saying that it is sensible and will change the way investors see property funds which should be seen as a long-term investment.
Kay Ingram, director of public policy at Financial Planning firm LEBC, said. “The proposal that investors should give of up to six months’ notice to facilitate a redemption appears to be a sensible and practical way to avoid funds having to close at short notice and for extended periods due to liquidity issues. For the retail investor, bricks and mortar property funds should only form that part of their portfolios to which they do not require easy access with other more liquid funds being available for emergency and short term spending.
However, Ms Ingram warned that the FCA should consider how it will treat property funds held in estates due to the ramifications of a notice period on inheritance tax. She said: “It may be necessary to waive this notice period for property funds held in estates as HMRC would normally require any IHT to be settled within this time frame and executors could not gain probate prior to settling any IHT.”
Several investment platforms have also stated their support for the changes.
Ryan Hughes, head of active portfolios at AJ Bell, said: ““The liquidity mismatch that can occur in open-ended funds has been in sharp focus since the Woodford debacle and property funds are where this problem most often rears its head. There is currently over £12.5 billion of investors’ savings trapped in open-ended property funds that are suspended.
“The FCA’s proposal to introduce a notice period for withdrawals from open-ended property funds is eminently sensible. It will ensure that property fund managers can manage their portfolios more effectively and give them time to sell properties in a controlled way in order to meet redemptions.
“Perhaps more importantly it should also change the way investors view property funds. Property should be seen as a long-term investment but daily trading on these funds has led to investors assuming they can get their money back whenever they want whereas in reality this has not been the case in many instances. Having a notice period of between 90 and 180 days should change this perception and means investors are less likely to get a nasty surprise when they want to withdraw their savings.
“Notice periods won’t call a halt to all property fund suspensions because in times of severe market stress property managers still might not be able to sell properties quickly enough and there will still be the requirement from 30 September this year to suspend funds when there is uncertainty over the values of more than 20% of the portfolio. However, it would give managers greater flexibility to meet redemption requests and should change investor’s perceptions of what to expect.”
However, other commentators have suggested that the rule change could kill off property funds in favour of ETFs and Investment Trusts.
Adrian Lowcock, head of personal investing at investment platform Willis Owen, warned that the notice period could put some investors off property funds. He said the suggested change should present the opportunity for Investment Trusts and ETFs to come up with an alternative proposition for investors.
Mr Lowcock said: ““At present regulation contributes to a liquidity discrepancy because property funds cannot be bought and sold at the same frequency. This is the challenge posed to the FCA and open-ended funds.
“There is no doubt by putting a six-month notice on the funds they will become unappealing to many investors, especially in a time when investors are used to being able to access a growing range of investments with daily liquidity.
“Six months is a long time for any investment and the price you get 180 days later could be materially different from the one you expected. However, the notice period will help remove short term investors and would make the asset class less volatile and less susceptible to sell-offs.
“There will be some disruption, but there are alternatives and the change should present an opportunity for Investment Trusts and Exchange Traded Funds (ETFs) to come up with a proposition that works.”
However, Cedric Bucher CEO of property fund manager Hearthstone Investments does not expect investors to move en masse to Investment Trusts and ETFs. He said: "Other markets such as Germany have over the past decade successfully moved to regimes with reduced redemption frequency for open-ended funds and the sectors have seen very healthy growth since. Whilst there are fund structures such as REITs or ETFs with daily liquidity, they behave more like equities and are unsuitable for the majority of private investors who tend to be have a low to medium risk profile. This has been painfully experienced again during February and March this year.
"It is now down to advisers, fund of fund and discretionary managers and critically platforms to see whether they can and want to embrace innovation. The current experience during the suspension of most property funds is encouraging – platforms and advisers, unlike in 2016, have now developed processes and systems to handle suspended funds within their client portfolios without challenges experienced previously. Also, the industry has experience in handling non-daily dealing instruments such as cash term deposits or structured products, all of which are permissible in an ISA amongst others."