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At a recent NatWest Trustee and Depositary Services webinar, panellists from across the industry gathered to discuss the current situation in relation to property fund suspensions, as well as looking forward to potential changes in the future.
- An established process for fund suspensions, which was tried and tested as a result of the Brexit referendum in 2016, provided a framework for early engagement within the industry
- Regulatory intervention post-2016 and clear expectation in the event of material uncertainty helped facilitate a much more orderly process, less media scrutiny and clearer communication with investors
- Early dialogue with depositaries is important to agree what’s in investors’ best interests before lifting fund suspensions, taking into account the material uncertainty rule, liquidity and Financial Conduct Authority (FCA) expectations
- Now is a good time to establish new products that better match the requirements of investors, providing more flexible fund structures and a better correlation between dealing and fund assets
The NatWest Trustee and Depositary Services (NWTDS) webinar panellists Lora Froud of Macfarlanes, Jacqui Bungay of AREF, Craig Bowie of NWTDS and Justin Upton of M&G discussed the challenges that the UK property funds industry continues to face following government action during the pandemic. The panel noted that material uncertainty created over the valuation of property funds as a result of the closure of large parts of the market has resulted in little buying or selling activity.
While this was an unexpected event and created exceptional circumstances requiring the suspension of property funds, there was precedence from the Brexit referendum, when a significant number of managers were also required to suspend dealing in property funds. This, coupled with the new FCA rules being introduced in September, “was helpful as it concentrated people’s minds on material uncertainty”, said Craig Bowie, director, regulatory and technical, at NWTDS.
“With new rules specifying that funds suspensions are lifted as soon as material uncertainty falls to less than 20% of the scheme property, it is important that fund managers engage in early dialogue with depositaries to discuss what is in the best interest of investors given the liquidity of the fund,” he added.
It was noted that the experience gained from the referendum meant the industry was much better prepared when coronavirus struck, leading to clearer and timelier communication with investors. Fund managers were proactive in helping clients understand that any decision to suspend a fund is not taken lightly, and is done in the best interest of investors. The panel also suggested that media scrutiny was less intense on this occasion, due to improved communication with investors.
The Royal Institution of Chartered Surveyors (RICS) continues to have regular meetings with property valuers to review the material uncertainty and consistency of the valuation process, as well as assessing developments across sectors, as the lockdown gradually lifts. There is now more clarity and certainty regarding properties in the healthcare, government and essential worker office markets, especially when compared with those in hospitality and retail.
Financial stability is key
A concern was raised that, given the lack of transactions seen recently, there was potential for funds to reopen into a market where they may be subject to redemptions. Having sufficient capital reserves to meet redemptions, and not disadvantage existing investors, will be key when material uncertainty is removed, panellists agreed.
The FCA has clarified that if material uncertainty abates it doesn’t expect the automatic lifting of fund suspensions. The onus will continue to be placed on fund managers to ensure that there is sufficient liquidity in the fund and ultimately to keep the interests of the investors at the forefront of their minds. Taking this into account alongside other rules that require suspension of funds, such as liquidity, this gives a clear indication that funds should not reopen, only to have to be suspended again, as this would not be in investors’ best interests.
“With new rules specifying that fund suspensions are lifted following material uncertainty falling to less than 20% of scheme property, it remains important for fund managers to engage in an early dialogue with depositaries”
Craig Bowie, director, regulatory and technical, NWTDS
Looking to the future
Whilst panellists felt that new rules in September 2020 for Non-UCITS Retail Schemes (NURS) would go some way to providing clarity, there are still challenges for open-ended daily dealing funds investing in illiquid assets. Given the time horizons to sell property assets, a mismatch still exists against investors’ expectations requiring access to redemption proceeds on a daily basis.
Work is ongoing by the FCA and the Bank of England (BoE) to clarify the regulatory framework in this area. On 3 August, the FCA published a consultation paper about daily dealing property funds, with particular emphasis on notice periods for redemptions.
Peter Christmas, director, client management at NWTDS said: “The UK property funds sector is important for investors as they seek to diversify assets. NWTDS has a historically strong association with this sector and we look forward to working with regulators, asset managers and AREF to support the right proposals to evolve this sector.”
On 5 August, the BoE published its August Financial Stability Report. Christmas said that the BoE’s Financial Policy Committee will continue to engage with the joint BoE and FCA review of liquidity mismatch in open-ended funds. “In particular, it will seek to address distortions that discourage the use of funds with longer redemption notice periods or closed-ended funds,” he added. “These may be more appropriate vehicles for investing in certain illiquid assets.”
Looking forward, work is ongoing with the Investment Association to deliver innovative solutions to address the current mismatch between the liquidity profiles of property assets and the daily dealing capability. The new long-term asset fund (LTAF) is being discussed to potentially give asset managers more flexibility around liquidity, investment and borrowing powers, tailoring redemptions based on underlying assets and providing retail investors access to long-term asset classes and environmental, social and governance (ESG) investments.
Future innovation is needed
While the panellists broadly agreed communication amongst industry stakeholders and investors was seen as a positive outcome of the coronavirus crisis, it was noted it will be important to balance the needs of all investors in suspended funds to open at the earliest opportunity, taking into account fund liquidity challenges as valuation uncertainty is lifted.
Going forward, it is also important that the industry continues to innovate to deliver products that provide opportunities for investors at the same time as delivering financial stability for long-term assets. This is an issue the industry is likely to be grappling with for some time to come.