Global regulators recommend exit fees for property funds

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Fund managers investing in hard-to-sell assets such as property should charge clients for withdrawing their cash in an attempt to discourage a rush for the exit, global financial regulators have recommended.

The Financial Stability Board and International Organization of Securities Commissions on Wednesday published guidance for asset managers, saying that investors who withdraw their money from an open-ended fund — a portfolio that allows investors to inject or withdraw cash on a regular basis — should not disadvantage clients choosing to remain in the fund.

The guidelines come as global authorities comb over the fallout from the coronavirus-led panic that swept across markets of March 2020, which forced investors to sell assets in a ‘dash-for-cash’ and exacerbated market instability.

Property funds in particular, whose assets can take time to sell, have come under pressure in recent years as investors rush to withdraw their cash, spooked by rising global interest rates and depressed commercial real estate valuations. Regulators are concerned redemptions can spiral out of control if they force the fund to sell illiquid assets at knockdown prices, further spooking investors.

“There’s a substantial portion of the funds industry with significant illiquid assets,” said Martin Moloney, Iosco secretary-general.

“There’s certain obvious candidates,” he added. “If you think about the turnround time to get rid of the property asset, that is very long, that is months, and if you’re offering somebody daily redemption with an asset on the other side that takes months to release, there clearly is a timing problem.”

Blackstone limited withdrawals from its Real Estate Income Trust in December and BlackRock this year started paying back investors stuck in its UK Property fund since early last year. UK fund managers including M&G, Schroders and Columbia Threadneedle have also previously limited withdrawals in their UK real estate funds after experiencing surging redemption requests.

Regulators have taken note. The European Central Bank warned of “declining market liquidity and price corrections” earlier this year, and said open-ended real estate funds are vulnerable to a “structural liquidity mismatch between their assets and liabilities”.

The FSB and Iosco are recommending a range of ways for managers of open-ended funds to manage liquidity. These include swing pricing, a mechanism whereby the net asset value of a fund is adjusted up or down when investors buy or sell into a fund to reflect the costs incurred.

Another recommendation is for subscription or redemption fees, where a fixed fee is charged to redeeming investors “for the benefit of the fund to cover the cost of liquidity”.

“These tools can be used to . . . prevent redemptions from having negative effects on remaining investors,” said John Schindler, FSB secretary-general.

“In effect it works like a fee,” said Moloney about the proposed measures. “It’s about imposing on the redeeming investor a cost which we have long since recognised arises when somebody redeems from the fund.”

He added that the two authorities are seeking to provide “a more coherent and systematic approach around the world to ensure that those investors that are leaving pay the full cost.”