UK regulators have raised concerns that some open-ended property funds may not be able to keep the promises they make to investors who want to cash out. The Financial Conduct Authority (FCA), the country's main financial watchdog, said that in certain real estate funds, redemption requests could outpace the amount of liquid assets available to meet them.
The warning comes from a broad review of more than 11,000 alternative investment funds sold to UK investors—a category that includes hedge funds, private equity, and other non-traditional vehicles. The FCA said it did not find a sector-wide shortfall, meaning the overall market is not facing a liquidity crisis. But property funds were singled out as a particular area of concern.
Why property funds are different
Unlike stocks or bonds, which can be sold quickly on an exchange, real estate is a slow-moving asset. Selling a building takes time—finding a buyer, negotiating, and completing legal paperwork can take months. That makes it hard for a fund that invests directly in property to raise cash quickly when many investors ask for their money back at once.
The FCA's review estimated that about 10% of the net asset value of these property funds could be redeemed within 30 days, but only about 7% of their assets could realistically be turned into cash in that same period. That gap—between what investors might want to withdraw and what the fund can actually pay out—is what regulators call a liquidity mismatch.
This is not a new problem. Open-ended property funds have long been a tricky product because they offer daily or frequent dealing, yet the underlying assets are anything but liquid. During times of market stress, such as the 2016 Brexit vote or the early days of the pandemic, several UK property funds suspended trading because they could not meet redemption requests. Those suspensions trapped investors for months, sometimes years.
What the FCA's review found
The FCA's review covered a wide range of alternative funds, not just property. It looked at whether funds had enough liquid assets to meet potential redemptions under normal and stressed conditions. The overall conclusion was reassuring: no market-wide shortfall was detected. That suggests the broader alternative fund sector is generally well-prepared for investor withdrawals.
But the property sector stands out as a weak spot. The FCA's numbers indicate that, on average, property funds could face a shortfall if a significant number of investors tried to exit within a month. The watchdog did not name specific funds, but the finding applies to the category as a whole.
Regulators have been paying closer attention to liquidity risks in recent years, especially after the 2020 market turmoil. The FCA has already introduced rules requiring some funds to hold a minimum level of liquid assets, but this review suggests more may need to be done.
What it means for investors
For everyday investors, this is a reminder that not all funds are created equal. Open-ended property funds offer the convenience of being able to buy and sell units regularly, but that convenience can be an illusion when markets get rocky. If a fund cannot sell its buildings quickly enough, it may suspend redemptions, leaving investors unable to access their money when they need it.
Investors who hold property funds should be aware of the liquidity risk. It is not a prediction that a crisis is coming, but it is a signal that these funds are more vulnerable to cash-flow problems than other types of investments. Those who need guaranteed access to their money in the short term might want to consider more liquid alternatives, such as real estate investment trusts (REITs) that trade on stock exchanges, though those come with their own risks, including share price volatility.
The FCA's review is also a broader reminder about the importance of understanding what you own. Alternative funds can be complex, and their liquidity profiles vary widely. Before investing, it pays to read the fund's prospectus and understand how quickly you can realistically get your money out.
Regulators are likely to keep a close eye on property funds. If they decide to tighten rules further, it could affect how these funds operate, potentially leading to changes in redemption terms or the types of assets they hold. For now, the message is clear: property funds may not be as liquid as they appear.
