FCA’s 180-day rule ‘announces the end’ of real estate funds

Warning bells have been sounded that the city watchdog’s proposals to impose a 180-day notice period for open-ended real estate funds could ‘spell the end’ for retail investors in portfolios real estate.

Earlier today (August 3), the Financial Conduct Authority released a consultation paper on floating rules that would require investors to give notice – potentially up to 180 days – before their investment is redeemed on a fund real estate with variable capital.

The FCA said there was a “liquidity mismatch” between the underlying ownership held in these funds and the daily basis on which investors bought and sold units and that the notice period would allow the fund manager to plan the sales of real estate assets so that it can better respond to requested redemptions.

It would also allow for greater efficiency within funds, as managers would be able to allocate more of the fund to real estate and less to a cash buffer to deal with redemptions, the regulator added.

But experts argued that the long wait could cause advisers to question the suitability of the products for retail investors while making it “impossible” for the majority of clients to own real estate funds.

Problem for advisers

Mike Barrett, consultant at Lang Cat, said: “[The rules] could well spell the death knell for open-ended real estate funds used by more than a small minority of advised clients.

“About 82% of advisory firms manage a centralized investment proposal in one form or another … and the fact that these solutions are owned by more than one client means that it becomes impossible to hold real estate funds,” because individual clients will divest at different times. “

Mr Barrett said this would result in real estate funds being used only on a “tailor-made basis” and that the expected return should justify the additional risks and complexity introduced.

A source from a large consultancy firm, who did not want to be named, agreed, saying it was likely the rules would make real estate an asset class that was “only sought after by investors. more sophisticated “, such as those willing to invest in private equity. directly.

Likewise, Alan Lakey, director of Highclere Financial, estimated that a 180-day notice period would make life “very difficult” for advisers, saying they were likely to be “reluctant to consider ownership” , especially for clients who thought liquidity was important.

Bowmore Asset Management client director Charles Incledon agreed. He said: “Many financial advisers will simply stop recommending open-ended real estate funds to their clients.

“This will make it more difficult for these investors to diversify their portfolios. “

Unattractive choice

Others believed the rules would simply make investing in open-ended real estate funds unattractive to most investors.

Adrian Lowcock, Head of Personal Investments at Willis Owen, said: “There is no doubt that by giving six months’ notice to funds they will become unattractive to many investors, especially at 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 noticeably different from what you expect. “