CP20/15: Liquidity mismatch in authorised open-ended property funds

Read CP20/15 (PDF)[1]

Why we are consulting

We are seeking to reduce the potential for investor harm that comes about because the terms for dealing in units of some property funds are not aligned with the time that it takes to buy or sell the buildings that the funds invest in. This type of property fund needs to hold a significant cash balance. Otherwise, it might not have time to sell properties to pay investors who can request their money back at short notice. If a fund runs out of cash, this can cause it to suspend dealings. As a result, this can cause investors to request their cash back in anticipation of such suspensions, potentially increasing the problem further.

To address this, we propose that investors must notify fund managers in advance that they want to redeem their investment. We are consulting on the precise length of this notice period, proposing between 90 and 180 days for these funds. The aim is to enable funds to operate fairly and efficiently in the interests of all investors. We anticipate that the introduction of notice periods would deliver the potential for a material increase in returns to property fund investors, as the funds could operate in a more stable and sustainable way, with more assets invested in property and less in cash.

Funds should be resilient during periods of stress, and operate in a way in which all investors are treated fairly. If we implement this proposal, we will seek to measure success through evidence of fewer incidents of liquidity-related stress in authorised open-ended property funds in the long term.

Who this applies to

Our proposals will primarily affect:

• managers of UK authorised property funds, constituted as NURS
• depositaries of these funds
• feeder funds that invest in these property funds
• master funds that invest in property, which these property funds invest in
• ancillary service providers
• providers of investment services offering access to these funds, including Self-Invested Personal Pension (SIPP) and Small Self-Administered Scheme (SSAS) providers, as well as Individual Savings Account (ISA) managers
• distributors of these funds
• investment intermediaries who advise on or invest in these funds
• unit-linked insurers who offer insurance contracts linked to these funds
• discretionary wealth managers, including those who offer model portfolios
• other professional or institutional investors
• consumers who invest directly in UK authorised property funds, or who are exposed to these funds through their pension contributions or their long-term life assurance policies

Our proposals may also be of interest to:

• managers of other types of UK property funds
• managers of other UK authorised funds
• investment managers who manage investments on behalf of UK authorised funds

Next steps

This consultation has now closed.

We will consider all feedback, and subject to the responses received, we will seek to publish a policy statement and final handbook rules as soon as possible in 2021.