What effect will longer redemption periods have on property funds?

Commercial property has become one of the most sought-after ‘alternative’ asset classes of the past decade. Real estate literally puts the ‘real’ into ‘real assets’ (assets with intrinsic value due to their physical nature) and investors are prepared to sacrifice rapid liquidity in return for the higher yield that property offers.

Investors in open-ended property funds don’t even have to sacrifice liquidity. In many cases open-ended funds offer daily redemptions – but there have been huge problems with this in recent years. Some funds have suspended dealing during times of heavy outflows when fund managers could not sell off underlying physical properties fast enough to support redemptions.

So to alleviate this stress, the Financial Conduct Authority (FCA) now proposes to require investors to give 180 days’ notice in open-ended funds before their property investments are redeemed.

If you think this will make open-ended property funds less attractive, then you should consider how in Germany the financial regulator Bafin requires investors to give 12 months’ notice before they can get their cash out from these vehicles. The measure has bolstered the real estate fund sector there. One fund expert said open-ended property funds are now more robust and are essentially used more intelligently by investors.

Recent months have seen healthy flows to open-ended real estate funds based in Germany. They collected €1.3 billion of cash through March, April and May. This was obviously during a time of high market stress but investors perhaps took comfort in knowing sudden, steep redemptions would not affect them. The BVI, Germany’s fund association, says the longer redemption period – introduced following the 2008 crisis – has restored investor confidence in the real estate funds sector and was related to reduced panic selling during the Covid-19 turmoil.

Germany’s experience shows there is no reason to panic over the FCA’s proposal to deal with panic selling in real estate funds and that property is likely to become more, not less, of an investment allocation.