The regulatory framework in which UK real estate funds operate has evolved in recent years. A central theme has been how funds that invest in illiquid assets, such as real estate, manage the rights of investors to redeem their interests in the fund.

The FCA Consultation

The FCA formally started consulting on changes to rules on the liquidity of such funds as long ago as August 2020 – its aim being to seek to address the so-called "liquidity mismatch" between open ended property funds (in which units can normally be traded on a frequent basis) and the underlying property assets (which may take a significant time to sell, particularly during downturns in the commercial property sector).

In order to manage the risks to investors in open ended funds, who might incur significant losses if funds are required to dispose of assets under "fire sale" conditions to allow exiting investors to cash out their positions, the FCA suggested a mandatory notice period of between 90 and 180 days before investments can be redeemed.

Minimum notice period introduced in some cases

In stages between 2022 and 2023 the FCA introduced the "Long Term Asset Fund" as a new type of open ended fund available to retail investors, which includes a minimum 90-day notice period for redemptions. That notice period should make it less necessary to suspend redemptions in the way that some managers have had to do with property-holding funds during downturns. Currently there are only a small number of Long Term Asset Funds operating in the market.

In certain other property investment fund models (for example funds structured as "non-UCITS Retail Schemes") funds are subject to different regulatory requirements on redemption – in particular to balance the interests of exiting and remaining investors, which can result in tension between those interests. This contracts with closed ended funds such as "Real Estate Investment Trusts", for example, which are not subject to regulatory requirements on redemption.

In summary, the regulatory framework that a particular property investment fund operates in may significantly impact the fund's liquidity and, particularly in challenging market conditions, can increase pressure on funds to dispose of property assets to fund investor redemptions.

If you are a manager, investor or commercial landlord dealing with the varying regulatory landscape of real estate investment or, if you have any queries about the risks and opportunities posed by these changes and how they might impact you or your business, please do not hesitate to get in touch with the writers or your usual Brodies' contact.

Contributors

Lucie Barnes

Partner

Jamie Dunne

Legal Director