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Real estate trusts brand FCA’s property fund review a ‘joke’

7 November 2018

Real estate investment trust managers have criticised the regulator for failing to tackle the problems investors are facing by investing in commercial property funds

The City regulator’s consultation into illiquid assets on the back of the post-Brexit property fund fiasco is a ‘joke’ that is failing to protect investors, say investment trust managers.

The Financial Conduct Authority (FCA) launched a consultation following the investor scramble to withdraw money from open-ended UK commercial property funds after the Brexit vote in June 2016. Most were forced to suspend trading and temporarily bar withdrawals or impose penalties on those who did pull out.

Although the funds reopened, the FCA said their managers could make improvements in contingency planning, oversight, and disclosure.

However, speaking at an event organised by the Association of Investment Companies, closed-ended real estate investment trust (Reit) managers said their open-ended counterparts, which do not trade on the stock market like trusts, were a bad way to access physical property.

Richard Shepherd-Cross, manager of Custodian Reit (CREI), said ‘the illiquid assets review was a joke’ and pointed out that ‘investors should not need protecting from a flawed structure’.

Calum Bruce, manager of Ediston Property (EPIC) , was unconvinced by the recommendation for funds to be suspended earlier, referring to where the document said suspension should happen when the independent valuer expresses uncertainty about the value of ‘immovables’, such as commercial property.

He also criticised the idea that open-ended funds should keep money back in order to have some liquidity should problems arise in the property market again.

‘They argue that liquidity should be kept back but if [funds] aren’t investing [the full amount of investors’ money] then that is a negative [for investors,’ he said.

‘The whole model is flawed.’

Bruce said it was not inconceivable that what happened after the EU referendum in June 2016 would happen again when Brexit formally takes place on 29 March next year. If there was a volatile market reaction, suspensions of property funds could reoccur, he said.

‘The same thing that happened after Brexit could happen again,’ Bruce said. ‘If you invest in an open-ended fund and there is volatility, there is a risk you will not get your money out.’

By contrast, while investment trust share prices could trade at depressed valuations well below their asset values, they could always be sold and therefore offer an exit. 

Shepherd-Cross said the financial crisis showed open-ended funds were not the best way to invest in property.

‘Open-ended funds have proved themselves to be wholly inappropriate for investors’ capital and they’re still out their raising money,’ he said.

He said the funds had tried to ‘separate pricing and liquidity which they shouldn’t’, unlike investment trusts whose price is governed by supply and demand ‘without affecting the long term performance’.

Figures from the Association of Investment Companies (AIC) show that it is not just the structure of Reits that attracts investors but also returns compared to open-ended property funds.

The average dividend yield on a UK commercial property investment trust is 5.3% versus 3% for ‘heavyweight open-ended funds’. Over the past 10 years trusts posted an annualised net asset value return of 7% versus 4.3% for the equivalent open-ended fund.

‘What makes me stressed is the data about the differences in performance is well known to us and open-ended managers too and still they promote these funds, and the FCA just wave it through,’ said Shepherd-Cross.

While open-ended funds undoubtedly have a responsibility to investors, Shepherd-Cross said investors also needed to look at property investments for what they are; long-term investments.

He said investors had ‘still not recovered’ from the days when ‘financial advisers recommended open-ended funds because they were taking a fat commission’ and investing in commercial property through these funds is ‘a way of behaving that is familiar to investors’.

‘If you are buying property…do not demand five minute liquidity and demand to get out when the market is taking a dive,’ said Shepherd-Cross.

‘Property performs over the long-term and gives long-term stable cashflow. If [investors] alight their investment strategy with what property does you will be very happy with it, but if you don’t, you will create hell for yourself.’

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