The change is effective from 1 September 2018.
Alan Collett, fund manager at residential property specialist Hearthstone Investments, says the changes bring clarity for investors.
“Currently the sector is like comparing apples with pears, with bricks and mortar property funds sitting alongside those that invest in property securities. These two types of funds have completely different performance and risk characteristics,” Collett said.
Ryan Hughes, head of active portfolios at AJ Bell, said the sector had become unwieldy.
Hughes, who used to sit on the IA Sector committee, said: “It had so many different types of funds in there, with the equity-based fund and the direct physical-based funds, that any meaningful comparison for people that were simply looking for sector rankings, was relatively pointless.”
Funds in the new UK Direct Property sector must invest at least 70% directly in UK property over five-year rolling periods. This includes commercial and residential property, as well as student accommodation, leisure and healthcare assets.
Funds that invest less than 70% of their assets in direct property for any continuous 12 month period or fall below 60% for any month, may be removed from the sector.
The Property Other sector will house property funds that do not meet the requirements of UK Direct Property sector. This includes direct property funds, which fail to meet the 70% threshold required to be in the UK Direct Property sector, as well as funds investing in property securities. At least 80% must be invested in property securities and/or direct to stay within this sector.
Collett said even within the new UK Direct Property sector, where his TM Hearthstone UK Residential Property fund will sit, there will be significant variation.
“Some are balanced funds investing across a range of commercial property types. Others target specialist sectors like student accommodation, leisure and healthcare property,” he said.
Hughes said the IA will likely be looking at other sectors that need to be reassessed.
The UK All Companies sector has got a lot of mid-cap focused funds and some large cap funds, which is difficult to compare, he said.
“That may be something they’ll look at in the future and would be the main one for me.”
Hughes said the IA should also be seeking meaningful homes for funds in the Specialist and Unclassified sectors.