Investment Association press briefing note on property funds and suspension of redemptions
Wednesday 6 July 2016
Property fund characteristics
- The asset management industry offers a wide variety of choices to investors interested in accessing property investments. Property funds can invest in direct property or property-related securities, or adopt a hybrid approach including both. Property funds may be structured both as open- or closed-ended.
- Investors choose open-ended direct property funds because their returns reflect the experience of investing directly in property, which offers the opportunity to diversify a portion of your portfolio away from the movements of traditional markets while accessing a popular, income-delivering asset class. Meanwhile, closed-ended property funds reflect wider market sentiment but offer more liquidity and so are ideal for investors who want confidence they can always sell out immediately, even if that means taking a loss in times of market stress.
- The asset management industry clearly recognises and explains the fact that open-ended funds carry a liquidity risk for unit-holders, and we have carried out work to help our members to understand and to manage the risks.
- Open-ended direct property funds were tested in the crisis markets of 2008 and performed well, with the suspension of redemptions used for short periods to prevent assets being disposed at unacceptably low levels, which would harm performance for the funds’ long-term investors.
- Fund investors’ interests are protected in a number of ways and the ability to suspend redemptions is one of the most important tools because it prevents fund managers from being forced to sell, in this case property interests, too rapidly. Suspension is a mechanism that is laid out under stringent FCA regulations, and when it is employed by one of our members, it shows that the regulations are working as they are supposed to.
- Since the 2008 crisis the Association of Real Estate Funds (AREF), working with the Investment Association, has carried out work to ensure open-ended direct property funds are fully equipped to manage challenges including work on valuation policies, key decision oversight, alignment of interests, and creation and redemption policy and practice.
- FCA rules lay down the broad requirements around fund suspension and this includes keeping the situation under review. It requires a review at least every 28 days, informing unitholders of how they may obtain information etc. The manager and depositary are under a duty to ensure that the suspension is only allowed to continue as long as it is justified having regard to the interests of unitholders.
- Investors in funds which may be suspended for a period of time will continue to receive all income streams from the fund’s portfolio as they remain invested.
- Communication is crucial so as to ensure investors in open-ended direct property funds are aware of the liquidity risks.
- AREF guidance requires the funds to carry out two-way, formal communication at least quarterly and more frequently at times of high subscription and redemption activity. Among other things they are also required to report to investors on current and potential liquidity, current subscription and redemption queues.
- Under AREF best practice recommendations both new and existing investors should also be disclosed the liquidity, or illiquidity of the underlying investments within a property portfolio, and where appropriate confirmation that the fund’s bid and offer prices have been determined in accordance with AREF’s Fund Pricing Recommendations.
- In addition, Key Investor Information Documents that are given to clients before investing in funds carry specialised notices informing clients about the liquidity risks. They also explain the general risks of investing in a fund and the reasons why suspension may be used.
- Most investors in property funds were advised by an intermediary such as an IFA before investing, and so had the opportunity to discuss the liquidity risks in detail with a trained expert, and most will have been advised to adopt a small position in property relative to their overall portfolio.
For further information please contact:
Director of Communications
M 07834 089 332
Head of Media Relations
T 020 7269 4635
M 07508 724 022
Press and Digital Media Officer
T 020 7269 4620
M 07508 724 066
About the Investment Association:
- The Investment Association is the trade body that represents UK investment managers who manage over £5.5 trillion on behalf of clients.
- Our purpose is to ensure investment managers are in the best possible position to:
- Build people’s resilience to financial adversity
- Help people achieve their financial aspirations
- Enable people to maintain a decent standard of living as they grow older
- Contribute to economic growth through the efficient allocation of capital
- The money our members manage is in a wide variety of investment vehicles including authorised investment funds, pension funds and stocks and shares ISAs.
- The UK is the second largest investment management centre in the world, after the US and manages 37% of all assets managed in Europe.