November 10, 2016 / 2:40 PM / 3 years ago

Britain rethinks property fund rules after Brexit investor panic

* Financial Conduct Authority to issue paper in new year

* Follows the suspension of many funds after Brexit vote

* Officials fear market contagion risk, threat to stability

* Other global regulators also turn focus to fund structures

By Carolyn Cohn, Simon Jessop and Huw Jones

LONDON, Nov 10 (Reuters) - British authorities are considering changing the rules governing commercial property funds to prevent a repeat of the investor panic that followed the country’s vote to leave the European Union.

Big funds worth around 18 billion pounds ($22 billion) in total were forced to suspend their activities after running out of ready cash when investors who feared property prices would collapse demanded their money.

The financial regulator is expected to focus on how the industry and its investors can be better protected during future periods of market stress. British and global authorities are already concerned about the knock-on effects to other markets if funds are forced to sell off assets quickly to try to meet redemption obligations.

The Financial Conduct Authority said a discussion paper would be published in the new year, without giving details about the reforms it is considering.

One option for the regulator could be to push asset managers away from offering funds which allow investors to pull out money on any given day without notice, according to industry players.

This model is far removed from the nature of the underlying assets being traded, as selling property can often take many months, a so-called ‘liquidity mismatch’.

If the FCA chose to change this structure, it could to some degree follow the example set by Germany after the financial crisis when it introduced a minimum holding period of 24 months for investments, and a notice period of 12 months for investors to get their money back.

While that would be a particularly extreme change, the industry sources said the FCA could instead make redemptions possible only weekly, monthly or quarterly.

Megan Butler, director of wholesale supervision at the FCA, said the regulator was talking to property fund managers about the suspension process as well as governance and oversight of these funds, which have grown popular among private individuals as well as pension funds and insurers.

“We encourage you to think carefully how you manage any long run risks here, particularly around redemptions, if you have clients looking for a quick exit,” she told a conference hosted by the Wealth Management Association on Wednesday, adding that a discussion paper would be published early in 2017.

John Cartwright, chief executive of Britain’s Association of Real Estate Funds, said it had also commissioned research into fund structure which would also be published early next year.


Liquidity mismatches have risen to the top of the agenda for regulators across the world after bond funds came under intense pressure to meet redemptions following big falls in prices during several period of market stress, including in the “taper tantrum” of 2013 when the U.S. Federal Reserve began tapering its massive asset-purchase programme.

Like the FCA, global regulators and central banks worry that financial stability can be undermined by funds rushing to sell assets quickly to meet customer cash demands.

Among the funds to suspend trading after the Brexit vote were Henderson Global Investors’ 3.9 billion pound UK PAIF Property Fund and M&G Investments, which lifted the its suspension on its multi-billion-pound property portfolio on Oct. 21.

Marc Haynes, London-based senior vice president at real estate fund manager Cohen & Steers, said the daily dealing structure of the industry had led to unrealistic expectations among many investors.

“You might have to restrict their investments or the onus needs to be on the advisers to help them, so they understand what they are getting into.”

Laith Khalaf, senior analyst at funds supermarket Hargreaves Lansdown, said regulators could potentially move the industry to a weekly dealing date, but that this was likely to be unpopular with investors.

Other industry sources said longer lock-up periods could hit flows into funds and reduce the fees earned by the managers who run them.

For some, suspensions were considered the fairest way to treat remaining and would-be investors in the funds, as opposed to writing down the value of the fund, which would have hurt investors who had no desire to exit.

Some have considered increasing cash reserves so they can process exit requests faster, but the drag on returns of parking cash in this way is painful, particularly in the current low interest-rate environment.

$1 = 0.8188 pounds Additional reporting by Tina Bellon in Frankfurt; Editing by Sinead Cruise and Pravin Char

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