Wealth & Finance April 2017

7 April 2017 Real Estate Funds - Lessons Learned from the EU Referendum To ensure that the property funds industry continues to work in the best interests of its clients, the Association of Real Estate Funds last year commissioned independent consultant John Forbes to assess the impact of the EU referendum result on the real estate market and evaluate whether any improvements could be made. Following the referendum, a number of funds suspended trading to pro- tect existing clients during a time of unprecedented market uncertainty. There was a lot of media attention and debate around whether suspen- sion was the best course of action. Published today, the John Forbes Report entitled ‘A review of real estate fund behaviour following the EU referendum’, concluded that although there are some areas for improvement, fund managers limited the impact of events and sought to treat investors fairly. The report also highlights that despite a wide range views amongst mar- ket participants, the overwhelming majority of IFAs surveyed preferred fund suspension over a general sale of assets at distressed prices in order to meet daily liquidity demands. Despite consensus that the industry and regulatory framework operated appropriately in its current form, John Forbes concluded that there are areas where regulation of retail investment in real estate should be re- viewed and improved. One particular area that the report suggests needs addressing is the ap- proach to the valuation of real estate assets in periods of volatility. The report calls for industry bodies and the regulator to work in harmony to ensure that there is greater clarity in the valuation process in terms of market uncertainty as this is vital to the future success of open-ended funds. John Cartwright, Chief Executive of AREF, said: “open-ended property funds offer investors of all shapes and sizes access to an asset class that they would otherwise be unable to, where returns are closely linked to the underlying assets. To ensure that these products can continue to operate efficiently and in the best interests of their clients, we took the opportunity, on behalf of the industry, to commission an independent analysis of what occurred following the referendum and identify where and how it can evolve. “We are pleased to see that both the industry and regulatory framework worked during the period and that fund managers acted appropriately and fairly to their investors. However, the industry recognises that areas such as communication and the valuation process can be improved. “We are ready to not only embrace positive change, but also drive it. Our work has already started, and we look forward to working with the regulator, other industry associations and market participants across the board to ensure that we can be better prepared for future periods of uncertainty.” John Forbes, Founder of John Forbes Consulting LLP, said: “the regula- tory and operating framework for retail investment in the UK in practice restricts retail investors to daily traded funds. Investors should have the choice to also invest in less liquid products, and those who choose to continue to invest in daily traded products need to be fully aware of the cost of liquidity, the risk that liquidity might not be available when they want it and the differences between funds. For investors to understand the products in which they are investing, communication by fund man- agers and financial advisers needs to be improved. “There are many operational similarities between model portfolios for re- tail investors, unit linked insurance products and defined contribution pension schemes. These are an increasingly important pool of capital and it is vital that they continue to be able to invest indirectly in illiq- uid assets including real estate. The real estate industry, the investment product providers and the regulators need to work together to ensure that choice is widened rather than reduced.” www.aref.org.uk

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