Interactive Investor

Call for 12-month notice period on property funds

17th November 2020 10:58

Hannah Smith from interactive investor


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The AIC, the investment trust trade body, says the measure will protect consumers from the risks arising from open-ended property funds.

The Association of Investment Companies (AIC) has called for the introduction of a 12-month notice period for investors wanting to withdraw from open-ended property funds, following several months of strife for the sector. 

Responding to a consultation from the Financial Conduct Authority (FCA), the investment trust trade body argued that a year-long notice period is needed to protect consumers and the economy from the risks arising from open-ended property funds. The FCA is currently considering a notice period of up to 180 days for these funds, many of which have just begun reopening after being suspended since March’s market turbulence.

The German model

The AIC notes that the approach it supports is in place in Germany, where property funds have not seen the sustained outflows experienced by their counterparts in the UK. 

The organisation says that research the FCA has cited found 40% of transactions within property funds would take longer than eight months to complete, more than the maximum notice period the regulator is proposing. In fact, the AIC argues that transaction could take longer still, taking into factors such as aborted sales transactions, tough market conditions, and the type of property assets a fund holds. 

‘Real-life situations’

“Notice periods for property funds will only work if they are set prudently and can cater for all real-life situations,” says AIC chief executive Ian Sayers. “The evidence is that 180 days is not enough. Without proper standards, funds will still need to hold high levels of cash, sell assets in a fire sale and be vulnerable to suspension.”

He adds: “The FCA’s priority 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 should adopt the German property fund model, which requires a 12-month notice period. This has meant that funds have operated as promised, without suspensions, and the sector has seen sustained investment even during some of the most difficult markets we have ever seen.”

interactive investor’s view  

interactive investor has also responded to the consultation, calling for fixed redemption periods that are long enough to be effective, as well as clearer disclosure for investors. While interactive investor agrees that the FCA’s efforts to tackle the liquidity mismatch in property funds is a good thing, there is no perfect solution for a structure that is not ideal for investing in such illiquid assets. 

interactive investor has called for investors to receive regular communication disclosing how much, in percentage terms, the fund has invested in illiquid assets. In addition, interactive investor points out that allowing fund groups to set their own redemption notice periods could create investor confusion. It adds that a longer notice period more in line with the German model could restore investor confidence.

interactive investor also urges the regulator not to overlook the role of investment trusts, which are a better option for investing in assets such as property due to their closed-ended structure, which frees fund managers from the burden of managing inflows and outflows.   

Moira O’Neill, head of personal finance at interactive investor, says: “While the FCAs’ proposals go some way to resolving the liquidity mismatch, the role investment trusts can play is still being overlooked. Trusts come with issues of their own, but they are still a better option, in our view, for investing in illiquid assets like property. 

“Yet they are mentioned only once in the consultation paper by the regulator, and only in passing, as an alternative means of accessing property. It does raise the question of whether the FCA is overlooking the existing secondary market in property investment trusts – funds are not the be all and end all.”

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