Chapters Financial News

With the significant effects of the COVID-19 pandemic, commercial property fund moratoriums have again been established. The potentially lengthy notice periods for redemptions, and therefore the inability of investors to access their money, has caused concern to investors and the regulator alike. People's lives change, with some heading for the retirement door and others divorcing, as examples. With a possible uplift in the numbers requiring their tax-free cash and income to be drawn as they leave employment or their spouses/civil partners, these fund manager positions might cause real problems.

The UK regulator, the Financial Conduct Authority (FCA), has stepped in with focused proposals to control significant elements of the system, as noted in their consultation paper CP20/15 of August 2020 entitled 'Liquidity mismatch in authorised open-ended property funds'. This applies to UK authorised property funds that are non-UCITs* retail schemes, or NURS for short. The document can be found here: https://www.fca.org.uk/publication/consultation/cp20-15.pdf . For reference, the consultation ends on 03 November 2020.

The FCA is consulting on the introduction of what it believes to be a fairer system by proposing a 180-day notice period for these property-based funds.

As the opening summary of this document notes:

The UK has a number of FCA-authorised 'daily dealing' funds which invest directly in property, for example commercial buildings. These are open-ended funds which offer investors the option to put money in and take it out on each working day (this is sometimes called 'offering daily liquidity').

Daily dealing can be attractive for investors because, assuming it can be maintained, it means they can invest in and move out of an asset class whenever they want. But the underlying asset that they are investing in cannot be bought and sold in this way. So, fund managers often hold large cash balances to manage the risk that investors choose to redeem their investments at any time.

And:

Fund suspensions (moratoriums) can protect investors from worse outcomes. But repeated suspensions suggest that the daily liquidity that these property funds offer cannot always be delivered and comes with a price. Investors in authorised open-ended funds need to have confidence that they will be treated fairly.

Moratoriums, usually for up to six months, on the ability to be able to trade funds in commercial property funds within pensions are nothing new, and are a tool that fund managers can use to protect the fund assets in the case of significant variances in cash flow. To reference this, following the vote for Brexit in the UK in the early summer of 2016, most commercial property funds placed moratoriums on their funds because of concerns that many investors would seek to encash their holdings. This change in UK fundamentals could have placed pressure on managers to sell commercial property assets, perhaps at a time they did not want to, to meet the outflow demand. As concern wavered, many moratoriums were withdrawn by early autumn 2016.

To give this article some balance, when commercial property funds are popular, a significant inflow of cash can cause a cessation of trading if maximum cash limits are exceeded, usually dictated by the fund's original mandate.

You can see from the notes above that the decision of when to put in place and to end a moratorium lies with the fund managers and this raises the issue of control of investors' capital, and the overall liquidity of the system itself. Interestingly, at the time of posting this blog, a few managers have detailed that they plan to relinquish their moratorium positions as of the middle of September 2020. It will be interesting to see if all managers follow this newly announced and planned change.

Reading this new FCA paper further, I cannot see any reference in the document to pensions-in-divorce sharing, noting the required implementation period of four months following a court sealed share order. Obviously, the planned 180-day notice period may breach this limit. It is unlikely that a spouse transferring to an ex-spouse would give prior and appropriate notice and the provider may not meet their obligations, or somehow make only a partial transfer if the transferring holding contains NURS. This may cause the receiving spouse detriment if they are relying on the funds to provide immediate benefit. We have of course responded to the FCA consultation paper on this topic.

A concern to investors in these funds? It should be and may well reduce the attractiveness of allocating pension and investment funds to this area, noting that alternatives such as Investment Trusts may be more effective in the future. With some already trapped in this asset class, the possible overlap of the current moratoriums and the introduction of the new regulatory rules by the FCA (if approved) may well cause a headache or two for those planning their retirement, divorce, or indeed both!

*UCITs = undertakings for collective investment in transferable securities

No individual advice is provided during the course of this blog.

Keith Churchouse FPFS

Director

Chartered Financial Planner

Chapters Financial Limited