Are open real estate funds threatened with extinction? – Analysis by Laith Khalaf of AJ Bell

An online survey of DIY investors with AJ Bell Youinvest suggests that most would sell their open-end real estate funds if the FCA provides for 90-180 day notice periods.

  • 54% of real estate fund investors said they would sell their holdings if a 3-6 month notice period was introduced
  • 76% of potential real estate fund investors said that a notice period of 3 to 6 months would deter them from investing
  • FCA could announce new rules as early as Q3 of this year (i.e. from now)
  • The closing of the Aviva Property fund officially begins on Monday 19e July

Laith Khalaf, financial analyst at AJ Bell, comments:

“Our survey suggests that the majority of DIY real estate fund investors will rob the co-op if notice periods are introduced, which FCA currently sees as a way to reduce the frequency of trading suspensions. Real estate funds aren’t likely to be bailed out by new investors making a difference either – three-quarters of those polled who were potentially interested in real estate said they would be pushed back by notice periods.

“These numbers suggest that the open-ended real estate industry could face an existential threat if the FCA imposes mandatory notice periods on these funds. In addition to retail investors, multi-asset funds, multi-manager funds and discretionary portfolio managers might also think twice before investing in open-ended real estate funds, if they felt that a notice period would reduce their own ability to rebalance portfolios and provide liquidity. to their own investors. There is also the problem that under current legislation, notice periods of 90 days or more would render real estate funds ineligible for inclusion in an ISA, where the rules state that an investor must be able to ” cash out investments within 30 days. HMRC is currently consulting on whether it can get around these rules, if the FCA introduces notice periods on real estate funds.

“The commercial real estate industry has already been rocked by long-term fund suspensions and increased uncertainty surrounding both office and retail space, due to the pandemic. The doomsday scenario is that the introduction of long notice periods causes a wave of additional withdrawals, which turns out to be a sunset event for the open-ended real estate industry. This is why the FCA takes its time to formulate the rules in order to avoid such dire consequences. It seems at least likely that any introduction of notice periods would lead to a decrease in the number of funds open in the market, with assets freezing around a few large funds.

Indeed, Aviva and Kames recently decided to call it a day after redemption requests piled up so high that their funds became unsustainable. The high level of withdrawal requests might simply be a reflection of a pent-up activity after lengthy trading suspensions. But before any FCA announcements, there could also be early sellers, to beat any possible rush to exits. The FCA said it would grant 18 months to two years after the release. announcement of any policy for changes to take place, but some may think it’s best to get their money back ASAP, just in case. Of course, many may have already done so, and the Money remaining held in open-ended real estate funds may ultimately prove to be sticky. While the majority of respondents to our survey said they would sell existing real estate funds if time limits were introduced. In return, they were fairly divided, 46% of them stating that they would keep their assets.

“The fundamental problem with open-ended real estate funds is that they are a square peg in a round hole. The underlying assets held by these funds take a long time to sell, while the funds themselves provide daily liquidity. This has led the funds to hold high levels of liquidity and suspend trading for long periods of time, which is clearly not a good thing for investors, and this is why the FCA wants to take steps to minimize the losses. risks of this happening in the future. Notice periods are probably the least bad option, but they are still not ideal for investors, and our poll suggests that many will simply vote with their feet.

“Some may exit ownership altogether, others may opt for investment trusts that provide real estate exposure, but whose closed structure means they can be traded throughout the day. There is, however, a price for this liquidity, which is reflected in the discounts given to many of these trusts, and which can indeed also be a barrier to cash-out for investors, if they do not wish to take a price so far. below the price deemed to be the value of the underlying assets. The only thing that open-ended real estate funds offer investors, under normal trading conditions, is the ability to buy and sell real estate at a level close to the market value of the underlying portfolio. This is valuable not only for retail investors, but also for many advisers and institutional investors who wish to gain exposure to real estate, but do not wish to take a position on whether a discount is justified or not. Institutional investors also often want to own real estate as a way of diversification from stock market investments, and equity-like volatility in investment trusts reduces this appeal. In theory, therefore, there is always a demand for open real estate funds, although this may be undermined by long notice periods.

The FCA has said it will make a final decision on the real estate sector no earlier than the third quarter of 2021, to also take into account comments from its consultation on long-term asset funds, which is seeking advice on the regulatory framework for open funds funds that invest in illiquid assets, including real estate, private equity and infrastructure. Last November, the Chancellor promised Parliament that the first long-term asset fund would be operational within a year, therefore, time is running out for a political decision, and the future of open-ended real estate funds is at stake.


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