Commercial Property Funds
Many clients will have seen that Bricks and Mortar investment funds have been suspended. Bricks and Mortar funds own physical property. Real Estate Investment Trusts (REITs) own shares in property companies and are unaffected.
The reason for the suspension is nothing to do with the safety of the funds or indeed the income they generate. It is because the Financial Conduct Authority (FCA) has introduced new rules which force an automatic suspension of a fund where there is “material uncertainty” over the valuation of its underlying assets.
Whilst less affected than equity markets, the UK property sector is not immune to the unprecedented set of circumstances Covid-19 has brought about. In accordance with the FCA rule book, where there are exceptional circumstances and it is deemed to be in the best interests of all shareholders, then a fund will be suspended.
The FCA rule is a sensible one. During a market crash, some investors will panic and sell. Property funds are usually valued a month in arrears so at the point of selling that investor may receive a share price significantly different to its underlying value.
At the same time, the early-bird sellers may impact the value of assets for the shareholders who remain invested (by forcing the fund to sell assets to meet redemptions) and that is unfair on the vast majority of shareholders who bought the fund for rising income and realise that short-term fluctuations in value is the price you pay for higher income.
All of our investors are recommended to “sit tight” and keep receiving the income (income payments will continue and that is the reason the fund was bought in the first place).
For investors who want to switch funds, transfer funds to another provider or indeed re-register the funds from say a taxable portfolio to a tax-free portfolio, the suspension means that you cannot do anything. We have, however, taken steps to change our recommended asset allocation. For those already holding property funds, we will maintain these holdings and account for their temporary suspensions in any wider changes we suggest. For those looking to increase property exposure, we will purchase the REIT equivalent.