Property Fund Changes to Prevent Suspensions
Published / Last Updated on 13/05/2021
At the point of and during covid-19 lockdown many property investments funds suffered as investors poured out of commercial property investment funds with concerns for liquidity as many commercial tenants were unable to pay rents due in full or part.
Liquidity issues hit, as they did in the credit crunch crisis, where cash held inside the funds that had been received by rents paid was now outflowing when people cashed out of these funds. The combination of lower incoming rents and more people cashing out meant that the cash buffer inside property funds disappeared resulting in property fund suspensions with no one able to cash in or switch out of these types of funds during the suspension period.
The Financial Conduct Authority (FCA) issued a consultation paper in August 2020 with initial findings published this week and a final FCA notice to be issued in Autumn 2021.
FCA Proposals
Investors will be required to give a notice period of between 90 days and 180 days of an intention to cash out or switch out of property funds.
- This will give fund managers time to ensure control and liquidity of the fund to protect those that choose to remain invested.
Investors will not be allowed to revoke i.e. reverse any decision to disinvest.
- This will give stability to the fund manager to control and manage mass disinvestment over a period e.g. having to sell an office block to raise liquid cash in a controlled manner rather then being forced to sell the office block at times of poor market demand and pressure i.e. to not sell at the worst time for a lower than market price.
Investors will not be allowed to buy back into the fund i.e. invest again whilst waiting to be disinvested during any notice period.
- This will prevent investors selling high and buying back in at a lower price before the original investment has even been sold (a type of short selling).
May Disqualify Property Funds from ISAs
If restrictions are placed on buying or selling property funds within an ISA penalty free, this may then disqualify the ISA under ISA legislation. The FCA is currently revisiting this.
Remember
Notice Period – No Revocation – No Short Selling
Using the above suggestions will likely protect both investors and fund managers in the longer term.
