There is “confusion” around why open-ended property funds are closing, according to Paul Richards, managing director of the Association of Real Estate Funds.
In an online session, The Great Property Fund Misunderstanding, he argued that there have been some “myths” that have seeped into the common narrative surrounding open-ended property funds.
As a result, Richards stated that there is “some confusion” around the reason why such funds are closing, with some large funds shrinking and closing over the last three to five years.
He argued that the funds, despite what has been happening to them, have been performing “pretty well” as they have outperformed corporate bonds over most periods.
He added that the funds' place in a portfolio is to produce income with relatively low volatility compared to listed assets.
The message here, according to Richards, is that the funds, despite recent news and fund closures, have “been doing their job”.
“They’ve been providing sound long term returns, good income streams, diversification against other asset classes and lower volatility which is exactly what they’ve been designed to do.”
He added that the problem is not with funds but with the “surrounding ecosystem”.
Regulation
Richard explained that the issue around the closures has been due to “regulatory uncertainty”, and that issue that goes back to 2017.
That was the first time the Financial Conduct Authority started to look at these funds in terms of “liquidity mismatch”.
“The AREF would say, around the real estate funds, they are certainly now not a large enough part of the universe to cause a risk to financial stability and they probably never were,” he explained.
Redemptions
Instead, Richard clarified that the fundamental reason for funds closing is because the high level of redemptions have taken them to below critical mass.
As a result of this, investors have been told they are not large enough to run a properly diversified real estate portfolio therefore the best thing to do is to close the fund.
Speaking on the commonality of this, he added: “We’ve seen a number of examples of that over the years.”
tom.dunstan@ft.com
What's your view?
Have your say in the comments section below or email us: ftadviser.newsdesk@ft.com
