An independent report commissioned by the Association of Real Estate Funds into the behaviour of open-ended property funds following the Brexit referendum has made recommendations for regulatory changes to ensure that retail investors in particular never again face a liquidity crisis amidst a wave of redemption requests.
The report, A review of real estate fund behaviour following the EU referendum – A report for The Association of Real Estate Funds, was produced by John Forbes Consulting LLP, and looked at the activities of fund managers of open-ended funds and how they handled the liquidity situation that developed once it became clear that the UK would exit the EU.
“The problem was largely one of liquidity in open-ended, authorised funds for retail investors (specifically Non UCITS Retail Schemes (NURS)… following the referendum result, a number of NURS retail funds suspended trading in their units,” the report’s summary notes.
“The unexpected result of the referendum caused a significant volume of redemptions on the morning of 24th June, abating significantly
immediately thereafter before rising again at the end of the month. This was not universal. Two funds did not see a change on 24th and others did not see a change later in the month. Some funds were better placed than others to deal with the liquidity challenges faced.”
“The challenges were compounded by the timing of the vote so close to the end of June. This meant that it also created significant uncertainty for the month end, quarter end and half year. The impact was therefore extended beyond daily traded funds. It also had an impact on quarterly and monthly allocation decisions by DFMs.”
“Many retail funds saw significant redemptions on 30th June or 1st July. These were often major changes by a very small number of discretionary investors. In some cases the retail fund saw redemptions on 30th June or 1st July higher than that on the day after the vote. Following the first fund suspension on 4th July, other funds faced significantly increased outflows for others and a domino effect with further suspensions. Within the constraints of the current regulatory and operational framework for funds for retail investors, managers did what they could to deal with the challenges. Generally the reaction of intermediaries interviewed in the preparation of this report has been broadly positive – they felt that managers did what needed to be done. This is not universally the case and there were strongly held views amongst a minority of investors that managers had behaved inappropriately. This applied to both suspension and pricing adjustments, and there was not a consistency of view.”
Having reviewed the evidence and outlined the timetable of what actually happened during those frenetic days, the report concludes, among other matters, that it recommends both a “review of regulation” as well as of “valuation”.
The report recommends “that the industry and the FCA [the UK’s Financial Conduct Authority] work together to undertake a comprehensive review of the regulation governing retail investment in real estate as an asset class. We would recommend a review across all relevant regulation.”
Additionally, it says that “a review is required of the approach to valuation of the underlying assets of open-ended funds. This review should be a joint initiative involving at a minimum the FCA, RICS [Royal Institution of Chartered Surveyors] AREF [Association of Real Estate Funds] and the DATA. Other organisation such as the Investment Association, may also have relevant views.”
To view the full report, click here: A review of real estate fund behaviour following the EU referendum – A report for the Association of Real Estate Funds.