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Flaws of physical property funds to drive demand for REITs


Marc Haynes, head of EMEA sales and client service at Cohen & Steers comments on the FCA’s proposal to tighten regulations for open-ended funds investing in illiquid assets. The regulator is seeking to avoid a situation similar to the aftermath of the Brexit vote, where redemptions forced many daily-dealing, open-ended physical property portfolios to suspend trading…

"The latest FCA proposals offer implicit recognition that shoehorning illiquid bricks and mortar property into a liquid vehicle structure has fundamental drawbacks. Its proposal that funds should suspend dealing when there is ‘material uncertainty’ about the valuation of at least 20% of total assets should prevent a run during times of market stress, but it will also likely lead to more frequent and widespread lock-ups. For investors wanting the assurance of daily liquidity, funds investing in listed property securities may offer a better solution. Moreover, these portfolios are typically much better diversified, offering geographic exposure to property markets beyond the UK.
 
“Given the continued uncertainty around the outcome of Brexit, UK investors must question whether it is time to seriously consider diversifying real estate investments away from a purely domestic-focused strategy to a more pan-European, or even global strategy. With UK property funds exposed to Brexit risks, investors have a strong reason for casting a wider net into other property markets via liquid real estate securities funds.”

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