Retail funds need to be reformed to heal Brexit scars

The scale of the redemptions from retail property funds in the immediate aftermath of the EU referendum may be less than first thought.

Earlier this month, the Investment Association revised its figures dramatically for net outflows from property funds in June and July from a total of £2.3bn to £1.4bn.

The £0.9bn adjustment is huge and may well reflect the cancellation of redemption requests as investors regained confidence in the weeks and months following the vote.

This is undoubtedly positive news. However, there is no getting away from the fact that the EU referendum has left its scars. Many funds are still considerably smaller than before the Brexit vote. For example, last week Henderson Group revealed the Henderson UK Property Fund suffered net outflows of £860m in 2016.

Furthermore, the referendum exposed just how vulnerable daily traded property funds are in the event of a market shock and threw up a myriad of issues from the thorny question of how best to balance the interests of investors wanting to exit and those wanting to stay, through to the more fundamental issue of performance.

Too often, retail funds are forced buyers when the market is hot and forced sellers when it turns cold.

However, the Financial Conduct Authority (FCA) is right to rule out banning retail investors from investing in open-ended property funds or preventing open-ended funds from investing in property. Even if you wouldn’t invent retail funds in their current form today, a ban would cause such disruption in the short-term that it would prove seriously damaging for investors, managers and potentially the wider property market.

That said, the FCA does need to come up with effective reform to prevent a repeat of last summer and better protect the interests of investors. Last week’s discussion paper from the regulator contains plenty of ideas. The challenge will be pinpointing which will be effective.

Guy Montague-Jones is associate editor (news) at Property Week

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