The Association of Professional Fund Investors (Apfi) has urged open ended property fund providers and investors not to give in to short-termism in their response to the volatility that has hit the value of shares in the sector since the Brexit referendum.
In a strongly worded statement, Apfi wrote that participants in the property funds market – including the UK’s Investment Association, Financial Conduct Authority and Bank of England, should “act in the best long-term interest of investors, to ensure that accurate not arbitrary fair value adjustments are applied by fund managers and that any redemption restrictions and costs are transparent, prudent but not punitive.”
“It’s important to note that the specific issues relating to direct investments in UK real estate market are unlikely to spill over into the wider market (albeit noting the widening discounts on Reits),” Apfi added in its statement.
“Daily pricing has become synonymous with transparency and liquidity. Yet the move to provide ever shorter liquidity at the fund level (daily, weekly, monthly) to appease retail appetites (which a fund manager can simply not attain on the underlying assets) has created avoidable structural and redemption issues.”
“For example, in recent years we have noted increased retail flows into property funds, as investors chase higher yields during a protracted cycle of low cash and bond rates. Latest events then serve as a good reminder to Apfi members, and all professional fund buyers, to respect the illiquidity of the property asset class, when investing, and exercise robust due diligence.”
“The current market standard is the Association of Real Estate Funds questionnaire (Aref). As markets continue to develop then this is an asset class the Apfi may review in future, as part of our global due diligence questionnaire project.”
That part of the statement on due dilligence is in reference to an ongoing project by the Association. Highlighted previously by InvestmentEurope, it was also raised at the FundForum International Berlin conference earlier this year, including via one of the panel discussions.
Jon ‘JB’ Beckett (pictured), UK Lead for the Apfi, and author of New Fund Order, said: “This is a wakeup call to all investors about liquidity and fund managers about the investor mix on their books. Professional fund investors, acting on behalf of clients, should always carefully allocate property in accordance with a longer term investment horizon.”
“This may mean reevaluating the use of property to simply achieve ‘diversification’. Fund buyers should always be mindful of the liquidity gap between a funds’ net asset value (NAV) frequency and the liquidity and valuation of the underlying assets.”
“We call on other industry bodies to instil calm and ensure that their members are following best execution and best practice. We call on the media to report developments factually and to avoid the temptation of sensationalism. We all should be mindful that the exit door in illiquid assets classes may not be wide enough if and when investors head towards it, all at once. Conversely, investors whom do herd out of the asset class, regardless of the cost, may find they later regret the decision.”