Open-ended valuation questions

The property open-ended fund sector (led by the Association of Real Estate Funds – AREF) has been undergoing a review of the events following the referendum last year.  At the time I couldn’t believe the overexcited coverage that it attracted in the mainstream media   AREF has published a consultation draft of a report, A review of real estate fund behaviour following the EU referendum (click here). In addition to reviewing the impact of the referendum, the report puts forward a number of recommendations in order to reduce the impact of market shocks in the future.  Also the report’s a very good primer for anyone who would like to get a good handle on these real estate investment vehicles.

The Financial Conduct Authority are also getting in on the act and are consulting on a Discussion Paper  Illiquid Assets and Open-Ended Funds (click here). One of the many issues that the FCA are consulting upon is on views on possible approaches to the valuation of illiquid assets.  Last summer was a difficult time for valuers of real estate open-ended funds – see here and here for previous blog posts on the valuation problems.

The fundamental problem in the Brexit-related crisis in June 2016 in the OEF sector was a combination of a liquidity mismatch between OEF units and the underlying real estate assets.  An inability to mark prices to market in a timely manner forced funds to suspend trading or impose high exit penalties on fund unit sellers.    It was not possible for transaction evidence from the real estate market on price shifts to emerge fast enough in order to mark asset prices to market in the required timescales.  Even though many of the structural problems of the vehicles tend to be linked between the liquidity mismatch between the fund units and the underlying real estate assets, like pretty much every other real estate crisis, people seem to be looking accusingly at the valuers.


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