Gated property funds. What’s the future look like and what are risks of gating in other areas?


Many investors will be aware, through bitter experience, that open-ended property funds are currently gated, or closed to redemptions and new investment. So, what does this experience mean for the future, what can we learn and what is the risk of gating in other investment areas?

The concept of gating with respect to Open-Ended Investment Companies (OEICs) and Unit Trusts (UT) first came into focus during the credit crunch in 2008. At the time of the Lehman’s collapse, there was a sudden stampede for the door as cash became king and those funds invested in illiquid assets, such as commercial property, quickly ran out of cash. The Authorised Corporate Directors (ACDs), who oversee the transactional activity, implemented their suspension clauses to protect remaining unitholders which subsequently stopped all further transactional activity.

For many investors it was a big wake up call. As the credit crunch thawed, the funds re-opened and investors realised that the attractions of commercial property remained as a recovery play and the demand for redemptions quickly dissipated. Consequently, nothing changed, whilst investors had another wake-up call when the Brexit Vote returned an unexpected Leave result on 23rd June 2016. Investors concluded that commercial property would be one sector particularly affected and many rushed for the door. Round two of fund suspensions occurred once more. There was widespread condemnation from marooned investors within the media with many complaining that nothing had changed since the credit crunch, despite the obvious conflict between having daily dealing within funds that have predominantly illiquid underlying assets.

Examples of periods of property fund gating


This remains the case today. There is no distinction in place for an investor with regard to the liquidity of the underlying assets within one retail open-ended, daily dealing OEIC/UT and another. There is no requirement for the promoter, ACD or fund manager to make the investor aware when this could be the case and no requirement to declare that there is a risk that during a major market set-back, an investor may end up holding a suspended investment where they cannot get their money back, on demand.

COVID-19 has cruelly exposed this conflict once more where most bricks and mortar commercial property funds are currently suspended and there is no certainty as to when they may reopen. What is worse this time around is that the asset class is unlikely to experience the usual recovery in tandem with economic conditions. The virus has brought about a huge change in corporate thinking with regard to remote working and the need to occupy expensive offices in city centres. This means that when these property funds do reopen, there is likely to be a significant mark down in the value of the assets, whenever the valuers can be assured of what the value is, given the likelihood of reduced demand and a probable reduction in development expenditure. It could be some months before this becomes clearer.

There needs to be a change. Maybe that comes as a change in the risk declarations, or possibly it could be something more fundamental. This is not unique to property but relevant to any fund that has illiquid underlying assets but needs to provide daily dealing for retail investors. Perhaps the way forward is to restrict such assets to investment trust structures, which is why renewable infrastructure funds are all investment trusts. The market for wind turbines and solar farms is not particularly liquid and abundant with buyers. Another idea could be to introduce a liquidity measure such that when a fund gets to a certain size and has significant stakes in unquoted businesses which would be difficult to sell, think Woodford, then daily dealing is removed subject to some sort of calculation. This would however affect a lot of funds but clearly there needs to be a change.

So, our guidance would be, when investing in any daily dealing open-ended fund, always consider the liquidity of the underlying assets, not just today, but historically at times of market stress. It could prevent some nasty surprises and orphaned assets in the future.



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