FCA considers 180-day wait for property fund withdrawals

Investors could be forced to give up to six months’ notice before pulling money from property funds, as part of the City watchdog’s efforts to assist the struggling sector.

Most investors in open-ended property funds are able to buy into or sell off their holdings on a daily basis. However, the Financial Conduct Authority is consulting on new rules that would force investors to give between 90 and 180 days’ notice before redeeming their funds.

The proposals are meant to prevent a run on cash reserves at property funds by addressing a “liquidity mismatch” between how quickly investors are able to ask for their money back and the amount of time it takes for fund managers to sort out the sale of property to pay them back.

That mismatch has led to a number of fund suspensions in recent years after downturns in the UK commercial property market, including in the wake of the Brexit vote and during the Covid-19 pandemic. The regulator said existing rules can lead to a run on funds, putting consumer cash at risk.

“The FCA is concerned that the current structure could disadvantage some investors because it incentivises investors to be the first to exit at times of stress,” the watchdog said. “This can potentially harm those who remain if the fund suspends or assets are sold rapidly due to liquidity demands.”

M&G’s UK property fund – previously worth £2.5bn – was forced to ban customers withdrawals in December 2019 after a surge in redemptions by investors worried about Brexit and the retail downturn.

Other fund suspensions – including by Standard Life Aberdeen, Aviva Investors and Legal & General – followed in February and March as the Covid-19 crisis took hold. According to Interactive Investor, eight UK property funds remain suspended, also including Columbia Threadneedle, Janus Henderson and Kames.

Similar issues plagued the investment funds previously run by the one-time star stock-picker Neil Woodford.

Woodford’s flagship fund was first suspended in June 2019 when it could not keep up with customer redemptions because of the amount of unlisted and harder-to-sell assets in the portfolio. The fund is being wound down.

Christopher Woolard, the interim chief executive of the FCA, said: “We think that our proposals will help further our consumer protection objective by reducing the number of fund suspensions, preventing unsuitable purchases of funds, and by increasing product efficiency for fund managers.

“We hope the proposed new rules will directly address the liquidity mismatch of these funds, making them more resilient during periods of stress and allowing them to operate in a way that all investors are treated equally.”