The Financial Conduct Authority (FCA) is floating the idea of new rules designed to improve investor experiences in open-ended UK Commercial Property Funds.
Most are currently suspended due to uncertainties on the value of the properties because of the COVID pandemic. In the past, they have placed restrictions on withdrawals due to a lack of cash within the funds themselves. The period after the Brexit vote was an example of this.
What is the problem?
Investors can access money in these funds in days. However, the underlying properties can take weeks or months to sell. This makes managing the cash reserves to fund investor withdrawals difficult. Most funds had looked to build large cash balances, around 20% of the fund, to make this easier. This reduces returns.
The FCA is proposing new rules which could mean investors need to give notice before withdrawing money. This notice period could be as long as 180 days, but the FCA is also consulting on a shorter 90-day period.
It is never nice to think your money is tied up. This will make investing in UK Commercial Property using funds a less attractive proposition for retail investors. One knock-on effect of introducing a notice period could be that they could not be held in ISAs.
What have you done?
Last year, we recommended to our clients that they no longer hold UK Commercial Property Funds in their portfolios. Instead, we recommended a Global Property Securities Index fund. These funds hold Real Estate Investment Trusts (REITs). As listed equities, investors can sell them very quickly. Conversely, this means they are subject to the short-term swings in the equities market. In the term, they perform much more like other listed equities than the property market in which they invest. Over longer periods, they offer performance closer to the underlying property market. We have had to alter our portfolios to account for this.
We believe over the long term they will help us further diversify our portfolios They invest globally, so they should be less exposed to the fortunes of a single sector or country. The fund we have selected also costs around 0.60% pa less than a UK Commercial Property fund meaning more of the underlying returns will flow back to our clients.