FCA’s Andrew Bailey: Property fund structures should be reviewed

Andrew Bailey FCA PRA Bank of EnglandThe structure of open-ended property investment funds may need to be reconsidered following the suspension of trading on the Standard Life Investment’s UK property fund, says the new FCA head Andrew Bailey.

Standard Life Investments suspended trading on its £2.7bn UK real estate fund in response to a rise in redemption requests “as a result of uncertainty for the UK commercial real estate market following the EU referendum result”.

Speaking at the Bank of England’s financial stability report press conference today, Bailey said Standard Life had made a “sensible move” to suspend redemptions but the FCA will need to readdress how suspensions work.

“We have been in close touch with these firms involved with these funds. But my preliminary feeling, after two and a bit days, is that these issues need to be looked at.”

The FCA is also in “very close touch” with firms in the sector, he says.

Bailey says: “We have a situation where we have open-ended funds holding illiquid assets and they don’t revalue naturally. The factor of suspension is designed into these structures to allow a valuation process at a time of redemptions – this is not a panic situation, it is to create a pause to allow that valuation process.

“It is sensible because from a conduct point of view we do not want differential treatment for investors.

Bank of England governor Mark Carney, also speaking at the press conference, says: “We’ve been flagging liquidity mismatching of Ucits and Reits funds for some time and the importance of having mechanisms to manage outflows consistent with the underlying assets that are held.”

The BoE warned today in its financial stability report that any adjustments in commercial real estate markets could “potentially” be amplified by what investors do in open-ended commercial property funds.

The bank says: “Although [investors] have a range of measures to manage stressed levels of redemptions, these open-ended funds could be forced to sell illiquid assets to meet redemptions if condition persist beyond funds’ notice periods.

“Any such amplification of market adjustments could affect economic activity by reducing the ability of companies that use commercial real estate as collateral to access finance.”

The bank noted that foreign investment in the UK commercial real estate market fell by 50 per cent in the first quarter of this year.

During the first week post-Brexit vote, Aberdeen Asset Management imposed a 3.75 per cent fair value adjustment on the £3.4bn Aberdeen UK Property Paif and feeder fund, and Henderson added a 4 per cent adjustment to the £4bn UK Property fund.