M&G’s property funds have been suspended since December last year, and this month some £12.8billion of investor’s money has been frozen across various other property funds.
Why is this?
To increase consumer protection, the city regulator, The Financial Conduct Authority, introduced a rule last year which required property funds to automatically suspend additional contributions and withdrawals when their valuers find material uncertainty over the pricing of 20 per cent or more of their assets.
‘Material uncertainty’ exists when independent valuers are unable to value the property assets of a fund with the same degree of certainty as would otherwise be the case in a healthy market.
The Royal Institution of Chartered Surveyors are holding weekly meetings with the UK’s major valuation houses to discuss market activity to determine when market activity is at a level where there is a degree of confidence that the material uncertainty clauses can be lifted.
Unfortunately, the government’s popularist policy of suspending forfeiture provisions within leases on both residential and commercial lettings has prevented the use of statutory demands to take rent, which is widely believed by property professionals to have significantly contributed to the ‘material uncertainty’ in values, afterall, what is a rented property worth when the tenant can remain in situ without paying any rent or face any consequences?
When 80 per cent of a fund’s assets are in sectors of the market where the clause no longer applies, they are allowed to re-open, however a material risk exists that pent-up demand to withdraw funds could further destabilise pricing and force downward pressure on valuations.