Bank of England Property Fund Intervention

Bank of England Property Fund Intervention.

We have read reports both online and in national newspapers that the Bank of England and the financial services regulator, Financial Conduct Authority (FCA), may be considering taking action to protect investment property funds.

Over the last couple of weeks we have seen a number of leading property fund managers either suspend trading in their property funds or even apply penalties by reassessing the property asset values inside their respective funds and reducing the net asset values and therefore the unit price by up to 5%, thus immediately reducing the value of your pension or investment property fund overnight.

It is thought that both the regulator and the Bank of England will consider the following measures to protect property funds and likewise protect "loyal" investors who remain invested in property funds:

Notice periods

They may introduce new rules to allow property funds to automatically have a notice period of let's say three months or six months for an investor to disinvest from a property fund. This will allow property funds to build up liquidity from incoming rents and new investment money or indeed property sales to ensure enough liquid cash is in the fund to allow people to switch out of their property fund investments.

More liquid assets in general

The regulator may also force property funds to have a greater proportion of property fund assets held in liquid investments such as cash or property company shares rather than real "bricks and mortar", again to ensure that a property fund can handle encashment requests.

Swing Pricing

Finally, a concept that is used in the US frequently is something called "swing pricing". This is where when there is a large "buy or sell” instruction received which is likely to affect the net asset value of any property fund, that the fund manager will be allowed to swing the unit price either up or down to reflect the revised property fund value and increased charges incurred after the transaction. This is very similar to the "market value adjustment (MVA)" that many with profits fund managers apply in times of stock market volatility. The MVA is designed to reflect the true asset value held by an investor, if they have received with profits bonuses % in the past and then markets have fallen meaning that the value of your investment is higher than what the real value of the fund is. Hence the MVA penalty adjustment to be fair to remaining, loyal investors.

Comment

The first option of notice periods is already used by many property fund managers where they face liquidity issues because too many people wish to buy or sell property funds, so this is quite easy to implement. Likewise, we suggest that swing pricing would be easy to implement with a set formula established by the regulator. Forcing property funds to have a greater liquidity percentage may take some time to build into a property fund but again, it would appear sensible to introduce such a measure.