Liquidity Mismatch in the UK Direct Property Fund Sector: Could Woodford repeat?

September 13, 2019 | Real Estate
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It is time for the FCA to act on illiquid assets,” says Bob Steers in an opinion published this week

Bob Steers warns that the Woodford Equity Income Fund imbroglio could repeat in the highly popular UK direct property fund sector.

A sudden spike in redemptions, as was the case in the Woodford Income Fund, could lead these open-ended funds to shut the gate on withdrawals pending the liquidation of properties, a typically longer-term asset. If the fund is selling into a weak market, the redemptions could come at a hefty loss for investors.

Boosting cash reserves is not a solution

By one estimate, funds in the IA Direct Property sector have doubled their cash holdings to as much as 20% to meet sudden liquidations. But, as Steers points out, this buffer is not free. Investors, in effect, pay for this safety feature because cash equivalents typically earn less than what the fund’s deployment strategy would otherwise achieve. In fact, investors are paying fund fees for managers to sit on cash.

Apart from being expensive, these cash reserves do not solve the basic problem of a mismatch in tenures between the underlying property assets and providing daily liquidity as in an open-ended fund.

What the FCA needs to do

Steers says the U.K.’s FCA should emulate the US. He argues the agency should allow only redemptions on a monthly or quarterly basis in the case of open-ended property funds. According to Steers, of the thousands of US mutual funds in existence since 1972 only six have suspended withdrawals.

What investors can do

UK investors can invest in listed real estate investment trusts (REITs). You can trade these REITs on the stock exchanges. REITs are accessible without liquidity issues or tenure problems.

Finally, for more insight into the Woodford case, check out our repeating coverage, right here.

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