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Advisers urged to study property fund regulations

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Advisers and wealth managers don’t understand the rules around commercial property funds and the way fund managers run them, a trade body report has argued.

A report from Association of Real Estate Funds commissioned to independent consultant John Forbes has called on the FCA to conduct a comprehensive review of the rules around open-ended property funds.

It comes off the back of the series of redemptions requests that led to the temporary gating of funds that followed the Brexit referendum.

Over £18bn assets in commercial property funds were put on hold in the weeks following the EU referendum because of fears over falling property values in the wake of the Brexit vote.

The report argued investors would be more safe in funds that would be able to preserve their money for longer periods in exchange for a higher return.

Property funds provided daily liquidity to investors where it was not needed and generated lower returns in cash, Forbes highlights in the report.

He says: “The regulatory and operating framework for retail investment in the UK in practice restricts retail investors to daily traded funds. Investors should have the choice to also invest in less liquid products, and those who choose to continue to invest in daily traded products need to be fully aware of the cost of liquidity, the risk that liquidity might not be available when they want it and the differences between funds.

“For investors to understand the products in which they are investing, communication by fund managers and financial advisers needs to be improve.”

The report says discretionary fund managers and wealth managers were those who demanded funds offer daily liquidity, while this is not usually imposed by regulation.

Apart from suggesting the need for different liquidity structures for these types of funds, the report also argues that the rise of model portfolios and technological change can allow wealth managers to change asset allocation more rapidly and easily.

Aref chief executive John Cartwright told the FT: “There are a lot of views that are valid, but what we’d like to move towards is not to have a rigid system, but to have a system that has flexibility.

“One of the key things is to find ways that will allow retail investors to access the asset class.”

In February, the FCA has launched a discussion paper on open-ended funds investing in illiquid assets to enhance market stability, promote competition in the sector and protect consumers.

The Aref said it will use its report as part of a submission to the FCA paper.

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