13 July 2018

Financial Times: Regulator urged again to act over commercial property funds

The author of an influential report into the structural weakness of commercial property funds has said the regulator “still needs to act” to make the market work better for investors.

In the wake of the Brexit vote just over two years ago, open-ended property funds holding around £15bn of investors’ money were forced to suspend trading. The structure of the funds meant they were unable to cope with the sudden wave of redemptions following the vote to leave the EU, as they could not sell underlying commercial property assets like office blocks and shopping centres quickly enough. By the time investors were able to trade again, property values had fallen significantly.

Since then, the City regulator has looked into whether to change the rules governing open-ended property funds. However, last month it said it would delay further rulemaking in this area because of the “scale of changes” needed to prepare the wider financial services industry for Brexit.

“The regulator still needs to act,” said John Forbes, the influential property consultant and author of a 2017 report commissioned by the Association of Real Estate Funds into how open-ended funds should be overhauled.

In the report, he suggested that property fund managers should stop offering daily cash withdrawal when it takes months to sell buildings.

“If you’re telling investors they can have cash back at the click of a button, then the underlying assets need to be liquid,” he added.

The problems with open-ended property funds are not new. In 2007, a series of funds halted trading and were forced to sell buildings at fire-sale prices, amplifying the drop in real estate markets.

David Wise, a property fund manager at Kames Capital, said although fund managers were “still waiting for something” from the regulator, “most people now recognise that open-ended property funds aren’t the best structures.

“I suppose there will be something to come, but my impression is that [the Financial Conduct Authority] has reached a point where there aren’t any quick or easy wins.”

The FCA and the Bank of England have previously raised concerns that fund managers might become forced sellers of commercial property when faced with large withdrawals, prompting a steep drop in real estate pricing.

The FCA is due to launch a consultation exercise on a “new package of rules” for open-ended funds, but the regulator could not give a date for when this might start.

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