The Financial Conduct Authority is being urged to review the rules governing open-ended retail property funds after the UK real estate fund management industry’s most tumultuous week since the financial crisis of 2008.
Funds totalling more than £14.2bn have halted redemptions owing to instability caused by the country’s vote to leave the European Union. They are M&G, Henderson, Standard Life, Aviva, Columbia Threadneedle and Canada Life.
Aberdeen Asset Management’s £3.2bn property fund has temporarily suspended trading until 11 July but slashed its pricing by 17%.
The Collective Investment Schemes rules that govern open-ended retail funds dictate they operate in a binary fashion – open for daily trading or closed for redemptions in a time of crisis. It is a system that can, and has, led to even greater turmoil in the real estate sector.
Funds managed on behalf of more sophisticated institutional investors are allowed to build in mechanisms such as requiring investors to notify the manager several months in advance if they want their money back, providing more stability.
John Cartwright, chief executive of the Association of Real Estate Funds, said: “We would encourage the regulator to review the Collective Investment Schemes regulations in respect of property funds to enhance fund structures in the future.”
The regulator has been lobbied to take such measures before. A report by PwC in 2012, commissioned by AREF, said: “The detailed workings of the timing and pricing of subscription and redemption are so fundamental to the model that a lack of transparency and understanding among investors has the potential to cause lasting damage.”
John Forbes, the author of the report and an independent consultant, said: “There is currently no choice of product because the regulation means that they are all the same.
“Investors should be given the option of ‘fund A’, which provides daily liquidity but in exceptional circumstances it can’t, and ‘fund B’, which says you don’t have daily liquidity. It is like a bank deposit account, you have to give notice but in exchange you get a more stable vehicle and a potentially higher return.”
After Standard Life Investments’ £2.9bn UK Real Estate Fund closed, Andrew Bailey, the FCA’s new chief executive, said: “My preliminary feeling, after two and a bit days, is that these issues need to be looked at.”
The FCA declined to comment as to whether it was considering launching a formal investigation into the sector.
The Bank of England has also warned that if funds became forced sellers and there was adverse pressure on values, it “could affect economic activity by reducing the ability of companies that use commercial real estate as collateral to access finance”.
Research by the bank said that a 10% fall in commercial real estate prices was associated with a 1% decline in economy-wide investment.
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