FCA scrutiny is further evidence of open-ended property fund flaws

The FCA has taken the extraordinary step of scrutinising open-ended physical property funds on a daily basis, as the sector continues to suffer sharp withdrawals. A long-term critic of the open-ended property fund structure, Marc Haynes – Head of Institutional Business, EMEA, Cohen & Steers – reacts to the latest development…

We have long spoken about the need for investors to address the liquidity mismatch of using open-end vehicles to invest directly in illiquid bricks and mortar property. We believe real estate securities are a better fit for open-end funds—not just for liquidity reasons, but for the ability to diversify beyond the UK property market.

We believe investors can no longer afford to turn a blind eye to the structural flaw of open-ended property funds – the inherent mismatch of trying to create daily liquidity in an investment vehicle when the underlying assets are illiquid, with the result that the ability to sell may at times become illusory and unreliable.

Liquidity is rarely an issue when times are good and the supply of capital is strong. But in stressed conditions, when there is a rush to exit, the liquidity buffers built into open-ended property funds may quickly become depleted, putting fund managers in the uncomfortable position of having to sell their higher-quality assets at discounted prices. Investors must also consider the cost of maintaining these liquidity buffers – both in terms of lost performance potential due to the low returns on cash equivalents, and the fact investors are paying fund managers to hold cash at the bank.

Given the continued uncertainty about the outcome of Brexit, you must question whether it is time for UK investors 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 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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