CoStar | 180 day rule could handcuff commercial property investors

This article originally appeared on CoStar on 17 August 2020. 

The Financial Conduct Authority recently announced it is considering rules that would require investors to give up to 180 days’ notice before making redemptions in open-ended property funds. The regulator’s consultation paper caused some concern about how open-ended property funds could survive given the added complications these rules would introduce. But investors should not have to risk their own interests for the chance to invest in UK commercial real estate, writes David Delaney, group chief executive, IPSX:

The investment case for UK commercial real estate is easy to make: the sector, valued at £935 billion with consistent returns and strong and stable dividend yield growth, has for years drawn in institutional capital. Especially at a time of low interest rates and economic instability, this tangible part of the investment universe offers security and reliability in an investor’s portfolio.

Unfortunately, some investors now face a growing number of hurdles when they want to access or diversify into property, potentially missing out on the benefits it offers. Why is that, and how can they get around these hurdles?

Declaring open-ended funds with illiquid assets “a square peg in a round hole”, the Association of Investment Companies made a crucial and timely point in January – one that property investors should now be thinking about. It argued that when things go wrong, retail investors – the man on the street – bear the brunt of fund failures.

An investor doesn’t need a particularly long memory to remember how these funds have repeatedly been forced to stop redemptions – whether in the wake of the global financial crisis, the Brexit referendum or the COVID pandemic. Each time, they were locked into investments they might have wanted to exit.

The FCA recently announced that it is considering rules that would require investors to give up to 180 days’ notice before making redemptions in open-ended property funds. This allows fund managers to plan asset sales before they’re forced into a fire sale.

After all, what can they do if investors want their money back and the fund doesn’t have the cash to meet that demand? Fund managers have to make a difficult choice: either they sell their assets, often below market value, in a scramble to free up reserves, or they stop redemptions all together. Meanwhile, the investor has no choice but to wait. Under the proposed rules, waiting will become the norm for investors who now face a six-month delay if they choose to exit open-ended funds.

The regulator’s consultation paper was met with concerns about how open-ended property funds can survive given the added complications these rules would introduce. But investors should not have to risk their own interests for the chance to invest in UK commercial real estate.

Public markets are an alternative to open-ended funds, giving investors real time price discovery and the option to buy and sell property indirectly through shares. Of course, not all real estate stocks are equal: portfolios will vary in complexity and diversity.

IPSX will provide investors access to single assets on our IPSX Prime market, and our first IPO is timed for this autumn. Given the transparency afforded by our admission rules, investors will have a clear understanding of the buildings’ income and covenant strength and can make reasoned decisions in real time. This gives them the best option to invest in property without the risk of their money being locked away in assets that might no longer make sense as an investment proposition.

If liquidity is what investors need, there is now a new option regardless of how open-ended funds change in years to come.