Regulator hold up
The FCA opened a consultation into the future of open-ended property funds, however last May it said it would not confirm specific property fund rules until a consultation on the long-term asset fund had been completed.
This was concluded in October, and the regulator has not outlined any further details to date.
A spokesperson from the FCA said they were unable to give a date when the new rules would be released.
One of the solutions touted by the regulator in the consultation was the introduction of notice periods for redemptions, either on certain days throughout the year, or a set time after a withdrawal request has been given.
However, this presents a headache for platform providers who currently do not have the functionality to adhere to notice periods for redemptions.
Head of investment research at AJ Bell, Ryan Hughes, said the open-ended property fund sector is in a state of paralysis until the FCA comes out with its review.
“They’re not part of [AJ Bell’s] investable universe while there’s such uncertainty hanging over them,” he said.
The delay also means the fund managers cannot really market the funds, and they will not really want to actively manage the portfolio as it will be hard for them to buy and sell property without knowing what is going to happen, he said.
“I think they really are in a state of paralysis.”
The case for real estate
Hollands said putting all the fund structure issues to one side, there is still a case for investing in real estate.
“Over the long run property can bring some important diversification benefits to the portfolio and it can be very good for income and there is an element of inflation-proofing as well.”
Although his view was that the best fund structure for investing in bricks and mortar assets is closed-ended, they are not a panacea.
“If you’re investing in the listed property investment company, you can sell at times of market stress but do bear in mind that you're likely to be doing so at a big discount to net asset value.”
When picking a real estate investment trust, Hollands said, it is important to consider the quality of the tenants and the length of unexpired leases.
“When the economy hits a rough patch, you want to be in portfolios where the tenants have locked in on long leases.”
Britton summed up the plight of open-ended property funds.
“So what went wrong?
“Nothing, really – the whole concept was flawed from the start.”
sally.hickey@ft.com
