Most retail investors would leave their open-ended property funds if the Financial Conduct Authority was to introduce 90-180 day notice periods, according to research by AJ Bell.
The firm polled 1,951 DIY investors on its Youinvest platform and found that over half (54%) of the 406 who did hold property funds would sell their holdings if a three to six month notice was implemented.
For the 1,545 investors who did not own property funds, three quarters said the measure would put them off investing in the sector.
“These numbers suggest the open-ended property sector could find itself facing an existential threat if the FCA imposes mandatory notice periods on these funds,” said Laith Khalaf, financial analyst at AJ Bell.
Property funds ineligible for Isa investors
The FCA has been puzzling over how to tackle the liquidity mismatch problem in daily-dealing property funds.
The sector has suffered a raft of suspensions during sudden and dramatic market falls, such as after the Brexit vote. More recently, during the covid crisis, property funds froze up after it became impossible to value their underlying holdings.
Notice periods have been floated by the regulator as a possible solution, but they have proved unpopular, with “only a small number” of respondents to the FCA’s consultation agreeing that adopting them was the best course of action.
In addition to causing a headache for professional investors – including multi-asset funds and DFMs – due to rebalancing issues, they would also make property funds ineligible for Isa investors, who must be able to convert investments into cash within 30 days.
HM Revenue & Customs is consulting on ways to work around these rules, should the FCA introduce notice periods.
Sector’s ‘extinction’
“The commercial property sector has already been rocked by long term fund suspensions, and the heightened uncertainty surrounding both office and retail space, as a result of the pandemic,” Khalaf said.
“The doomsday scenario is that the introduction of long notice periods prompts a wave of further withdrawals, which proves to be an extinction event for the open-ended property sector.”
Property funds have already been battered by redemptions since resuming trading after being suspended during the covid crisis. The M&G Property Portfolio saw £806m ($, €) exit when it re-opened in May.
The sector has seen two casualties with Aviva Investors and Aegon deciding to wind-up their frozen property funds over liquidity concerns.
The FCA said it will allow a period of 18 months to two years after announcing any policy for changes to take place. In addition to considering notice periods, it is also gathering feedback on an alternative open-ended structure, the long-term asset fund.
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