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Bank of England looks to stem the tide on gated property funds

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The Bank of England is considering new measures to halt the spate of property fund closures in the wake of the Brexit vote.

The Telegraph reports the Bank and the FCA are looking at a number of ways to shore up the property sector following the trading suspensions by the likes of Standard Life Investments, Henderson and Aviva Investors.

These include limiting liquidity to match the assets, for example by requiring investors to give a notice period of between 30 days to six months in order to redeem.

Property funds may also have to increase their liquidity buffers by holding more property-related shares and bonds, which can be more easily sold off than offices or retail parks.

Another option for the central bank is swing pricing, where investors who sell large holdings have to accept a lower price. This is said to be something the US Securities and Exchange Commission has also looked at.

FCA chief executive Andrew Bailey says: “Suspension is designed into these structures, it’s not a panic measure, it’s designed to deal precisely with that situation, where there’s been some shock to the market.

“It does point to issues that we will need to look at in the design of these things from the point of view of conduct and systemic stability.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. So their solution to a minority of investors having to wait some months for withdrawals is to force *everyone* to wait. Their solution to one person’s wonky nose is to spite everyone’s faces.

    And/or to force funds to hold higher-risk quoted equities (have they not noticed where the value of those have gone in the last few weeks?), despite the fact that many people hold bricks and mortar funds specifically because they don’t want to be exposed to the risks of gearing and fluctuating investor sentiment.

    They have also ignored the fact that Standard Life had well above the average in liquid assets already and they still felt the need to suspend.

    Absolutely nothing needs to be done here. The funds are working as intended and as designed. Unfortunately, because the defiant rise in the stockmarket has starved the London press of “FTSE falls by 10% as total economic collapse continues” headlines, they have instead latched onto the closures of property funds, none of which their readers hold or have ever heard of, to substitute as evidence of Brexigeddon. (The Grauniad stories on these funds have over 2,000 comments, most of the utterly clueless “Homes are for living in not for PROFIT” variety, but because they’re getting the kind of clicks that Nic Cicutti dreams about, they keep rolling them out even though none of their readers would normally have the slightest interest in commercial property funds.) This apparently has triggered the FCA’s “Something Must Be Done” alarms.

  2. The problem also then becomes that less of the money is actually invested in the asset class which investors have chosen. And/or there is greater volatility as usually property company shares will gyrate more than the actual underlying property itself. In theory, a moratorium on withdrawals is the best outcome but of course it worries people and can cause unrelated panic as this latest bout has done.

    Maybe an automatic withdrawal period of one year for everyone is a possible and then the bond companies can repay earlier if circumstances allow it, at their discretion or subject to some regulatory objectives being met? Then investors will stop using them as daily asset transactions too. If they want that they should by REITS etc and a fine asset class they are too with gearing if you want it – and hey, maybe ‘property bonds’ which only invest in REITS and these can be explained better to investors.

  3. The reality is that the dealing suspensions (not fund closures!) are primarily caused by large institutional investors – DFMs, multi-managers, model portfolios etc etc – and not individual investors per se reducing their exposure to this asset class. Therefore for those clients where their advisers have recommended a diversified multi-asset portfolio managed by a fund manager etc, have in the main been able to reduce their exposure in advance of the dealing suspensions. For others, well I hope they knew the risks………

  4. …all of which adds weight to the argument that illiquid assets should not be held in funds which offer daily or weekly liquidity, but in closed ended funds which are priced by the market and have liquidity provided by market makers at a sensible price. Property, with the vast spectrum of approved valuation methodologies (see RICS rules) is particularly vulnerable to very favourable valuations when people are buying and unfavourable valuations when people want to sell. This may be great when it gives investors an attractive ‘paper’ profit, but advisers and investment managers need to take responsibility for the accelerated downside as well.

    • “Sensible price” is stretching it. Closed-ended commercial property funds were trading at discounts of 25-30% at one point last week. The mantra that “you can always sell a closed-ended fund” ignores the fact that whenever we have a situation where open-ended funds are gating, the discounts on closed-ended funds become so ludicrous that you probably won’t want to, and most people will just hang on until the discount narrows – so they’re doing exactly the same as investors in an open-ended fund.

      And of course closed-ended funds can borrow money, which means that a crash can completely wipe them out. Most people would rather wait to receive at least some of their money back than be told they’re going to immediately receive zero.

  5. Since June the 23rd we seen 10 gilt yields go as low as 0.69% The monthly average yield for 5 year gilts is 0.33%, 10 years gilts is 0.94% and 20 year gilt yield are 1.42%. There is a strong possibility on Thursday but Bank of England rates are predicted to go down within a band rate of 0.125% and 0.25%
    If you ask the fund mangers what is a Property Fund’s objective the majority would state they want to achieve an attractive income return with some additional capital growth for clients. Property fund average yield at present are circa 4%-6% Given the current climate Property yields still look attractive. Last year many fund mangers gave warnings that capital growth on these fund could/would be affected
    So why in a well diversified portfolio in the current climate would you want to dispose of a yield income from property.
    This is why I totally disagree with the comments that is the institutions that are selling. It is more likely the retail investor who invested( may be a better way is speculated) in property when they could see the capital growth in double digit returns which many have achieved over last few years. These investors still treat commercial property investment through the prism of there own home and buy to let properties. To them it is all about capital growth and not income yield

    • The first bit about commercial property investment still being attractive for its yield is true but to propose that the bulk of redemptions are that of retail investors is complete fantasy

  6. If you look at the Std Life fund, there was a large withdraw and fall in value before the vote, it fell 6% in May !, and as far as I can see the fund was carrying 5% of £1.2bn – who is responsible for pulling by my calculation £60,000,000 from the fund? Maybe the regulations should limit holding to a % of the fund – 2% ?
    I did also have an email from an investment company proudly stating that they had managed to pull ALL their UK Property holding out before the problems, no reply when I asked how much, pointing out that they may have been responsible for the chaos ?

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