London, July 2016: when property funds shut their doors

In early July 2016, days after the UK voted to leave the European Union, many British savers found they could no longer withdraw money from their property funds. Nothing had gone bust: the buildings were still standing. The problem was one of timing, between units redeemable every day and assets that take months to sell.

A week of suspensions

The referendum took place on 23 June 2016. In the days that followed, redemption requests poured into open-ended retail property funds, invested mainly in UK offices, shops and warehouses.

At midday on Monday 4 July, Standard Life Investments suspended dealing in its UK Real Estate Fund, worth around £2.9 billion. The next day Aviva Investors (around £1.8 billion) and M&G Investments (around £4.4 billion) followed suit. Henderson Global Investors (around £3.9 billion), Columbia Threadneedle (around £1.4 billion) and Canada Life (around £450 million across several funds) came next. On 6 July Aberdeen closed its £3.2 billion fund for 24 hours, then extended the suspension to 11 July.

In all, according to Fortune, seven funds holding more than £18 billion of assets froze redemptions, close to three quarters of the money UK retail investors had in such vehicles. Other managers, Legal & General among them, stayed open but cut their exit price sharply, so that departing investors bore the cost of forced sales.

The liquidity mismatch

Regulators call the mechanism a liquidity mismatch. An open-ended fund promises to redeem units at their value, often on any business day. Yet an office block in Manchester cannot be sold in 24 hours: a buyer must be found, terms negotiated, legal checks completed. While outflows remain modest, the fund’s cash buffer copes. When everyone heads for the exit at once, the manager has two options: sell fast and cheaply, at the expense of those who stay, or close the doors.

The Bank of England had flagged the risk. Its July 2016 Financial Stability Report, finalised on 4 July, noted that these funds managed about £35 billion, roughly 7% of total investment in UK commercial property, and had seen significant outflows in the months before the vote. It warned that if stress persisted, they might have to sell illiquid assets to meet redemptions. The same report cut the banks’ countercyclical capital buffer from 0.5% to 0% to protect lending capacity. On 8 July the Financial Conduct Authority (FCA) issued guidance reminding managers of their duties: treat all unitholders fairly, value assets properly and avoid disadvantaging remaining investors when selling.

March 2020: the rerun

The funds reopened over the following months, but the underlying issue remained. On 4 December 2019 M&G suspended its £2.5 billion Property Portfolio, citing high and sustained outflows, political uncertainty and the troubles of the retail sector.

A few months later the pandemic triggered a broader wave. From 16 March 2020, funds run by Kames, Janus Henderson, Aviva, Standard Life, Aberdeen and Threadneedle closed one after another. This time the trigger was not primarily liquidity: valuers declared “material uncertainty” over valuations, and managers judged it impossible to set a fair price. According to the FCA, almost all UK authorised property funds had suspended dealing.

How regulators responded

The FCA had already tightened the rules. On 30 September 2019 it published policy statement PS19/24, which took effect on 30 September 2020. It created a category of funds investing in inherently illiquid assets (FIIA), subject to enhanced disclosure, liquidity risk management plans and closer depositary oversight. Crucially, such a fund must suspend dealing when the independent valuer expresses material uncertainty over more than 20% of its assets, unless the manager and depositary agree that continuing serves investors’ best interests.

In December 2019 the Bank of England and the FCA set out initial findings from a joint review. Three principles emerged: measure an asset’s liquidity by the discount needed to sell it quickly or the time needed to sell it without one; pass that discount on to redeeming investors; and align notice periods with the time actually needed to sell. In August 2020 the FCA consulted on a mandatory notice period of 90 or 180 days for property funds (CP20/15). In May 2021 it postponed a decision, partly because notice periods could have made these funds ineligible for stocks and shares ISAs. HM Treasury has since opened a route: from 6 April 2024, funds whose redemptions take between 31 and 185 days can be held in an Innovative Finance ISA.

The lessons

For anyone investing in property indirectly, the lesson boils down to one question: how do I get out, and at what price? Three families of vehicle answer differently.

• A daily-dealing open-ended fund promises liquidity its assets do not have; it holds up as long as outflows stay orderly.
• A listed vehicle (property company, closed-ended fund) can be sold on the exchange at any time, but at the market price, which can stray far from the value of the buildings.
• A fund with a long notice period makes exit slow but consistent with the nature of the assets. Swiss real estate funds are one example: redemption through the fund manager generally requires twelve months’ notice to the end of a financial year, with the stock exchange serving as the quick exit.

Our view: none of these structures is superior in absolute terms. The risk arises when investors believe they have liquidity that exists only in fair weather.

Key takeaways

In July 2016 seven UK open-ended property funds froze more than £18 billion within days, not because the buildings had lost their value, but because daily redemption promises exceeded what property can deliver. March 2020 confirmed the model’s fragility, for a different reason. Regulators responded with suspension rules, pricing principles and proposals for notice periods. For investors, the liquidity of a property investment depends first on the structure of the vehicle, not on what the marketing material says.