The FCA has published a consultation paper into open-ended real estate funds – the latest in a series of steps investigating the suitability of a product that allows for daily trading in a sector which is inherently illiquid. The backdrop to this consultation is the COVID-19 pandemic during which there have been some suspensions of funds and increasing requests from investors for their money to be returned. If implemented, what impact might the consultations proposals have for open-ended real estate funds?
The headline proposal in the consultation paper is that investors must give notice – potentially of up to 180 days but at least 90 days – before they redeem their investments in real estate funds. The hope is that by having notice of the need to raise cash, fund managers will be better able to manage the sale of real estate assets needed to meet redemption requests.
The purpose of the reform is to provide greater investor protection – the FCA saying that it is looking to "directly address the liquidity mismatch of these funds, making them more resilient during periods of stress". When funds are suspended, not only are investors prevented from accessing their funds, but fund managers are pressured to sell assets, with difficult decisions to make such as which assets to sell (the best performing asset may sell for the highest price but this does not take into account those investors who are staying invested and want the assets to remain part of the fund), and at what price (the market will be aware of a forced seller and bid accordingly). Throughout all this, managers need to be aware of their fiduciary duties.
The proposals, if implemented, would seem to bring the UK in line with jurisdictions such as the US and Germany. Although the proposals may not mean the end of real estate fund suspensions (the suspensions earlier this year were generally as a result of material uncertainty of a fund's value rather than issues connected with redemption requests), it is hoped that there will be fewer suspensions and, where there are suspensions, they will be for shorter periods. In addition, with a mandatory notice period for redemptions, managers may consider reducing the levels of cash reserves they hold.
A by-product of the new proposal may be that investors seeking daily trading in the real estate sector move to an investment product which invests in publicly listed real estate companies or listed funds.
The FCA consultation is open until 3 November 2020 with the aim being for policy statement with final rules to be issued as soon as possible in 2021.