Most retail investors would ditch their open-ended property funds if the Financial Conduct Authority were to introduce 90-180 day notice periods, according to research by AJ Bell.
The firm polled 1,951 DIY investors on its Youinvest platform and found that over half (54%) of the 406 investors who did hold property funds would sell their holdings if a three to six month notice period was implemented.
For the 1,545 investors who did not own property funds, three quarters said notice periods would put them off investing in the sector.
“These numbers suggest the open-ended property sector could find itself facing an existential threat if the FCA imposes mandatory notice periods on these funds,” said Laith Khalaf (pictured), financial analyst at AJ Bell.
Notice periods would make property funds ineligible for Isa investors
The FCA has been puzzling over how to tackle the liquidity mismatch problem in daily-dealing property funds.
The sector has suffered a raft of suspensions during sudden and dramatic market falls, like after the Brexit vote. More recently during the Covid crisis property funds froze up after it became impossible to value their underlying holdings.
Notice periods have been floated by the regulator as a possible solution, but they have proved unpopular, with “only a small number” of respondents to the FCA’s consultation agreeing adopting them was the best course of action.
In addition to causing a headache for professional investors, like multi-asset funds and DFMs, due to rebalancing issues, they would also make property funds ineligible for Isa investors, who must be able to convert investments into cash within 30 days.
HMRC is consulting on ways to work around these rules, should the FCA introduce these notice periods.
Doomsday scenario is notice periods prompt more redemptions
“The commercial property sector has already been rocked by long term fund suspensions, and the heightened uncertainty surrounding both office and retail space, as a result of the pandemic,” Khalaf said.
“The doomsday scenario is that the introduction of long notice periods prompts a wave of further withdrawals, which proves to be an extinction event for the open-ended property sector.”
Property funds have already been battered by redemptions since resuming trading after being suspended during the Covid crisis. The M&G Property Portfolio saw £806m exit when it re-opened in May.
The sector has seen two casualties with Aviva Investors and Aegon deciding to wind-up their frozen property funds over liquidity concerns.
See also: Property fund redemptions hold steady as another £186m heads out the door
The FCA has said it will allow a period of eighteen months to two years after announcing any policy for changes to take place. In addition to considering notice periods, it is also gathering feedback on an alternative open-ended structure, the long-term asset fund.
See also: Investors sceptical FCA LTAF proposal is the panacea for property fund liquidity mismatch
