Six-month wait for cash if DIY investors sell property funds
Investors could be forced to wait up to six months for their savings when they sell property funds under new rules being considered by the City watchdog.
The change is intended to bring an end to the periodic, but confidence-damaging closures where property funds trap investors' cash as too many have tried to sell at the same time.
The FCA proposed funds should make investors wait three to six month for their cash as standard. This would allow the managers enough time to sell properties and meet demands.
Affected portfolios include the popular L&G UK Property, M&G Property Porfolio, Janus Henderson UK Property, Standard Life Investments UK Real Estate and Threadneedle UK Property funds.
Under current rules, investors should be able to buy and sell units in property funds daily even though underlying properties in these funds cannot be bought and sold at the same frequency.
This has led to funds being suspended during times of market stress, such as now, when investors have rushed to take out their cash and properties were difficult sell quickly at fair prices.
Around £13bn of savers' money is still trapped in shuttered property funds after coronavirus caused the British economy to shut down in March and fund managers could not accurately value their property assets.
Several funds worth a total of £18bn were also blocked in 2016 after investor sentiment wobbled amid fears Brexit would hurt property values. They later reopened when it emerged that prices were holding up.
Suspending a fund can protect investors as fund managers are under less pressure to raise cash via a "fire sale".
The proposed three to six-month notice period would mean they can plan sales and reduce the likelihood of a fund suspending, the FCA said.
The watchdog added that its new rules would also enable funds to be run more efficiently. Managers could invest more rather than holding cash for unanticipated cash calls. Property funds have been known to hold as much as 25pc in cash, causing a serious drag on returns.
Christopher Woolard, of the FCA, said: “Our proposals will reduce the number of fund suspensions and prevent unsuitable purchases of [property] funds."
However, many investors would find the proposals unattractive, said Adrian Lowcock of broker Willis Owen. While fund closures can be frustrating, being forced to wait up to six months for savings to be returned was not much better, he said.
Ryan Hughes, of broker AJ Bell, said notice periods will not end all property fund suspensions. Fund managers are already required to close their funds whenever they are unsure about value of 25pc of their portfolio. This could still happen irregardless of the new six-month rule.
Dimitry Lipski, of fund shop Interactive Investor, said DIY investors should use investment trusts to access hard-to-sell assets like property
"No structure is perfect. The trust's share price may still fall significantly in a distressed market but we prefer trusts when it comes to illiquid assets," he said.
The FCA will make a decision in 2021 and is consulting on the proposed rules for three months.
