Investors wishing to sell their stake in an open-ended property fund could be hit by redemption fees under new recommendations from global regulators.
The rules are part of a number of proposals from the Financial Stability Board and International Organization of Securities Commissions to safeguard investors in funds where individuals may perceive a benefit from redeeming their cash first.
This can happen in open-ended property and infrastructure funds where there is a mismatch between the speed of redemption and the time taken to sell underlying assets in the fund.
The FSB proposed a number of other potential regulations for funds, including swing pricing, where a fund’s net asset value is adjusted in either direction to reflect the cost of an investor buying or selling, or adding or subtracting a variable levy from the fund’s NAV to decrease the price for subscriptions and passing on the liquidity cost to redeemers.
The consultation has been released after a joint analysis between the FSB and IOSCO in 2021 and 2022 found that investors redeeming investments may benefit at the expense of remaining investors in a ‘dash-for-cash’, like that seen in March 2020 as many countries entered lockdown.
Following the public consultation, the IOSCO will develop a final report for publication later this year
Declining investment
Open-ended property funds have seen periods of gating since a slew of withdrawals began after the Brexit vote in 2016.
Some £32bn was invested in property funds in 2015, 3 per cent of the total in UK funds, which dropped to £22bn (1.4 per cent) in November last year, according to the Investment Association.
The problem faced is the mismatch between the daily trading of open-ended property funds, and the illiquid nature of property, which cannot be sold quickly in the case of high redemption requests.
A slew of withdrawals has occurred after market volatility in recent years, including after the Brexit vote and during the pandemic where independent valuers said the market conditions left it impossible to value the makeup of the portfolios.
Former Bank of England governor Mark Carney famously said funds which invest in illiquid assets but offer daily dealing were "built on a lie".
The FCA introduced an open-ended investment fund in late 2021, designed to allow sophisticated investors and DC pension schemes to invest in illiquid or long-term assets.
sally.hickey@ft.com
