Advisors Blast Open-Ended Real Estate Funds

Tom Burroughes

19 March 2020

Financial advisors criticised the UK’s open-ended real estate funds market yesterday after another case of asset managers shutting funds temporarily to withdrawals, with the trigger this time being the COVID-19 pandemic.

Asset managers emailed this statement to WealthBriefing: “The FCA understands that certain Standing Independent Valuers have determined that there is currently material uncertainty over the value of commercial real estate (CRE). In such situations, a fair and reasonable valuation of CRE funds cannot be established. As a result, some managers of open-ended CRE funds have temporarily suspended dealing in units of these funds and others are likely to follow for the same reason.”

“Suspensions can be used by managers of open-ended funds, in line with their obligations under applicable regulations. In these circumstances, suspension is likely to be in the best interests of fund investors,” the regulator added.

The suspensions to funds, which typically offer daily dealing, twisted the knife into a sector already hit by interruptions. Late last year, M&G’s UK property funds were frozen because of political uncertainties, although the decisive Conservative election win on 12 December 2019 helped the market recover.

“The warning signs for property fund liquidity have been half a decade in the making – from the sharp falls in property fund values in the wake of the Brexit vote in 2016 to red signals flaring by the end of 2019 with the gated M&G property fund,” James McManus, chief investment officer, Nutmeg, the digital wealth manager, said.

“These underlying investments simply do not have the daily liquidity that they are being advertised with, and the managers of these funds are misleading investors on this promise. Unfortunately, it is no surprise that time and time again, it is the everyday investor who is left out of pocket; with no access to capital and expectations not met,” he said.

The saga again reminds investors that funds offering daily dealing in relatively illiquid assets such as property contain a risk/liquidity mismatch danger. The situation also fuels controversy about the case for/against so-called liquid alternative funds, as explained here by organisations such as London-based Blu Family Office.

“The ongoing coronavirus crisis...is a real concern for all of us,” Stephen Jones, chief executive of Kames Capital, said in a letter to investors (Reuters, 18 March, other media). “At the same time, we have had to contend with a sharply lower oil price as well as the impact of the ongoing Brexit negotiations. These issues are affecting all areas of the stock market, including property investing,” he was quoted as saying. The firm said it has informed the Financial Conduct Authority about the matter.

“Following continued market volatility and uncertainly for property funds, which began with the 2016 Brexit Referendum and continued in recent weeks with the coronavirus pandemic, the valuers of the Kames Property Income Fund believe the current market turmoil makes it difficult to provide a true value for the funds' underlying assets,” Kames said in a statement emailed to this news service.

“As such, Kames Capital has decided to act in the best interests of investors by temporarily suspending its Property Income Fund and Property Income Feeder funds with effect from 12 pm on 16th March 2020. This decision has been informed by the views of the fund’s independent valuer and taken with the agreement the fund’s depositary. The FCA has been informed about our decision,” it said.

Besides the firms mentioned already, other players offering open-ended funds with daily dealing are Aviva Investors, Canada Life, Colombia Threadneedle, Legal & General and Standard Life Aberdeen.

“Now that two of the main valuers of property have said they cannot accurately value properties, we should expect more fund suspensions over the next 24 hours and through this week,” Adrian Lowcock, head of personal investing at Willis Owen, an investment platform in the UK, said yesterday.

“This is another crisis for the open-ended property sector and a reminder that illiquid assets do not work well with daily dealing. With the FCA's focus on liquidity the managers of such funds need to think how to offer their services to investors in a different structure,” Lowcock said.