Should real estate funds be given 12 months notice?

The United Kingdom Association of investment companies argues that 12 months notice is needed to protect consumers and the economy from the risks of open real estate funds. This approach is adopted in Germany, where real estate funds experienced sustained investments before and during the COVID crisis, unlike the United Kingdom which experienced sustained cash outflows and long suspensions.

The Association said it welcomed the decision to use notice periods to protect investors, but believes the FCA (which recently consulted on open-ended real estate funds) should follow the evidence and not allow other considerations to influence its decision on the length of the notice period. period.

Ian sayers, Managing Director of the Association of Investment Companies (AIC), said:

“Notice periods for real estate funds will only work if they are set carefully and can adapt to all real life situations. The proof is that 180 days is not enough. Without proper standards, funds will still have to hold high levels of liquidity, sell assets on a discount sale, and be vulnerable to suspension. The priority of the FCA should be to protect consumers and it should not allow considerations such as the length of notice periods on cash deposits to influence its decision. The FCA is expected to adopt the German real estate fund model, which requires 12 months’ notice. This means the funds have performed as promised, with no suspension, and the sector has seen sustained investment even during some of the most difficult markets we have ever seen. “

Proof of a longer notice period on real estate funds

Research by real estate experts, and cited by the FCA, found that 40% of transactions would take more than eight months, which is significantly longer than the maximum notice period offered by the FCA. But this evidence still underestimates the time it would take for real estate funds to sell properties in order to repay investors.

The research does not take into account the time it takes for a fund to raise funds on property sales to cope with buyouts. The clock begins for a fund when the manager realizes that buyout pressure is forcing them to sell properties. This is earlier than when a property is first offered for sale or actively marketed.

The research does not reflect aborted sales transactions. These are a fact of commercial life and greatly increase the time required to sell a significant portion of a real estate fund’s portfolio to cope with redemption pressures.

Transaction times are getting longer under more difficult market conditions. International standards require repayment terms that can handle “tense market conditions” without the need to suspend the fund. This must include periods such as after the Brexit referendum and late 2019, the two times UK real estate funds have been suspended.

AIC research looks at real estate transactions in general, rather than in relation to an individual fund. As Woodford Equity Income Fund demonstrated, initial redemptions consume cash first, then more liquid investments. If the pressure on redemptions continues, remaining investors are increasingly exposed to investments that take longer to sell. It is not enough that the notice period allows an exit for investors who choose to leave first, leaving others exposed to the risk of suspension. The rules should protect everyone.

A notice period must cover all types of real estate funds. A fund with attractive logistics properties may have a very different ability to meet a 180-day notice period than a fund specializing in, for example, shopping malls.

The AIC also questions whether the FCA takes into account issues such as notice periods on cash term deposit accounts when setting notice periods for real estate funds. Cash deposits do not involve any risk to capital, and an account holder’s decision to withdraw their money is without prejudice to other deposit holders.

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