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Coronavirus - Considerations for property funds - UK

  • United Kingdom
  • Coronavirus - Country overview
  • Financial services and markets regulation
  • Real estate
  • Financial services

19-03-2020

Introduction

Given the evolving picture on COVID-19 and its impact on the UK economy there are a number of points which property fund managers should be considering in light of the FCA’s recent statements specifically on the virus and their previous work on illiquid assts culminating in Policy Statement PS19/24 “Illiquid assets and open-ended funds and feedback to Consultation Paper CP18/27”.  Whilst the new rules are not yet officially in force (having an effective date of 30 September 2020) PS19/24 suggests that ACDs and depositaries should consider if it would be in customers’ interests to adopt some of these rules ahead of time where to do so does not conflict with the rules currently in force. 

Material uncertainty valuations

We are aware that various standing independent valuers are taking a view that giving the evolving picture on COVID-19 their valuations should be presented on the basis of “material valuation uncertainty”.  This has potential impact on some property funds - NURS PAIFS - in light of the FCA’s rules on property funds with inherently illiquid assets due to come into force in September 2020.

The FCA stated in the revised rules that if:

  • a valuer of a NURS PAIF (which falls into the definition of a fund investing in inherently illiquid assets (“FIIA”)) has expressed material uncertainty about the value of one or more immovables under management and that material uncertainty applies to at least 20% of the value of the scheme property; or
  • a fund invests at least 20% of its value in a fund in which units have been temporarily suspended,

then the ACD must temporarily suspend dealings in the relevant fund unless certain specific circumstances apply.

The exceptions to this requirement are that:

  • the ACD and the depositary have agreed that dealings should continue;
  • they have a reasonable basis for determining that a temporary suspension of dealings would not be in the best interests of holders; and
  • the ACD and the depositary must not rely solely on a fair value pricing adjustment when making their determination.

Funds which operate limited redemption arrangements will also not be within the scope of the rules as they will not be classified as an FIIA.

Any decision not to proceed to suspension needs to be taken as soon as possible and in any event by the end of the second business day after the day on which material uncertainty applies to 20% or more of the value of the FIIA.  The FCA made it clear, however, that it was their assumption that suspension will generally be the most appropriate course of action.

This decision must be kept under review by the ACD and the depositary at least every 14 days, and the FCA notified of the result of the review.

The FCA has given some guidance on circumstances where it would be in the best interests of investors to suspend - for example if executing orders could not be achieved without significantly depleting liquidity and without selling property at a substantial discount.  This is important in light of the FCA’s statement “FCA information for firms on Coronavirus (Covid-19) response” (published 17 March and updated on 18 March) which specifically referred to the need to maintain liquidity,

We also expect firms to manage their financial resilience and actively manage their liquidity.

It should be noted that these rules have not at this point been extended to cover QIS PAIFS.

The FCA has issued a “Statement on property fund suspensions” which confirms that suspension in these circumstances is likely to be in the best interests of fund investors,

The FCA understands that certain Standing Independent Valuers have determined that there is currently material uncertainty over the value of commercial real estate (CRE).

Suspensions can be used by managers of open-ended funds, in line with their obligations under applicable regulations. In these circumstances, suspension is likely to be in the best interests of fund investors.

Deferred redemptions

Some QIS and NURS property funds may have deferred redemption powers set out in their prospectuses, in which case their ACDs should now be considering if they should use those deferral powers.  Key to this decision will be fairness to investors across the fund, how to treat investors who had put in a redemption request prior to the current crisis but whose deal has not yet been actioned, and those who are submitting redemption requests now for future dealing points later in the year.

Fire sales

The new FCA rules also provide a mechanism for allowing the ACD to reduce the price of an immovable to allow it to be sold more quickly to meet redemption requests.  If an ACD proposes this, they will need to liaise with the standing independent valuer to set the price.  The ACD will only be able to use this mechanism where the prospectus has expressly disclosed this as a tool.  Some funds may not yet have amended their disclosure to allow this, given that the effective date of the relevant rule is not until Q3. 

Firms which are facing these issues should be liaising with their depositary as a matter of urgency to put relevant steps in place.  Firms should also ensure that the relevant escalation and governance steps are taken in order to ensure senior level engagement in these decisions.

How can Eversheds Sutherland help 

The development of the 2019 Novel Coronavirus (COVID-19) outbreak continues to create contractual and other legal challenges which are in many ways unprecedented. Whilst the outbreak originated in China, its impact is being felt globally, and in response, we have co-ordinated across our own global offices to ensure that we centralise our know-how and are sharing best practice with our clients.

Eversheds Sutherland is widely recognised as one of the leading advisers to the investment funds industry, with one of the leading fund, asset management and regulatory teams..

We have over 40 years' experience of investment funds work and, in particular, authorised funds. The funds team is the only team recognised as being top tier/band in both the Legal 500 and Chambers directories.