Is Property a proper investment for an open ended fund?
One of the problems with investing in real estate is said to be its illiquidity. We shouldn't be surprised at that. After all, valuable assets with complications and little transparency need looking at before committing to buy. Corporate takeovers take time too. Shares in listed companies rarely trade at net asset value. So, there have been many attempts at introducing ways of making investments in property more easily traded.
Open ended investment companies are one such try. But the wobbles over Brexit and the experience of recessions have focussed the attention of regulators on how these operate. Both the FCA and the Bank of England have been looking at what happened in and after June 2016 when investors wanted out of the funds, but the cash held was not enough to meet redemption requests, leading to a blocking of withdrawals. Proposed solutions to the problem include regulations to block "first mover advantage", increased cash reserves and "lock-ins" of investment, requiring investors to remain in such funds for minimum periods. None is without risk to the wider market, especially if such funds take up a greater share of that.
So, what is to be done? Greater transparency would be excellent, together with the pricing of such investments better reflecting the risk premium of illiquidity. And a proper look at the valuation of the underlying asset, with this reflecting the essential characteristics of the stolidity of property as an asset. After all, the underlying market in the underlying asset is, by definition, illiquid. So why is it thought that what is essentially a derivative asset should be more easily dealt with, except at a discount, such as affects a REIT?
Britain’s Financial Conduct Authority has suggested measures to suspend investors’ ability to withdraw money from commercial real estate funds during periods of market turbulence, to stop funds and investors jumping the gun and trying to be the first to cash out.
However, the BoE’s Financial Policy Committee, which monitors risks to Britain’s financial system, said the new rules might not go far enough if open-ended fund investment made up a greater share of the commercial property market.
“On balance, the Committee concluded that, provided they were implemented as intended, the FCA’s proposed reforms were beneficial to UK financial stability,” the FPC said in a record of its most recent policy meeting discussions.
“But if open-ended commercial real estate funds continued to grow in importance in the UK ... the FPC agreed it should revisit the issue.””