The Liquidity Illusion

Fresh Financial Conduct Authority analysis has renewed attention on a structural weakness in some property investment products: investors can request their money faster than managers can responsibly sell the buildings supporting it.

The review found no market wide liquidity deficit. It did identify a specific gap in real estate funds. About 10% of fund net asset value could be redeemed within 30 days, while only 7% of assets were estimated to be liquid over the same period.

The difference appears modest until confidence deteriorates. Property sales require marketing, due diligence, finance and legal completion. Compressing that process can mean accepting a discount, selling the strongest assets first or suspending withdrawals.

A property fund does not become liquid simply because its units can be traded daily. The wrapper may offer frequent access, but the underlying assets retain their physical transaction cycle.

When redemptions accelerate, managers face three imperfect choices: retain more cash and dilute returns; sell property quickly and risk weaker pricing; or restrict withdrawals. A liquidity promise can therefore undermine the investment it was designed to make accessible.

This makes fund structure part of property due diligence. Investors should examine redemption terms, cash policy, leverage, valuation frequency and stress response alongside location, tenants, income and asset quality.

Greater regulatory scrutiny could strengthen structures that align investor exit rights with the time required to dispose of property responsibly:

• closed ended and listed property vehicles;
• funds using realistic redemption notice periods;
• controlled dealing windows and secondary markets; and
• digital administration that improves transferability without promising instant liquidity.

Technology can improve forecasting, reporting and secondary transfers. It cannot guarantee a buyer or abolish the time needed to sell an office, warehouse or residential portfolio at fair value.

The FCA previously considered notice periods of 90 to 180 days for certain open ended property funds. Its wider reform programme for alternative fund managers now creates another opportunity to align regulatory expectations with the realities of illiquid assets.

Longer notice periods may improve resilience but reduce flexibility. Listed REITs provide tradable shares, yet their prices can diverge from net asset value. Tokenisation may simplify ownership transfers, but it does not create market depth or guarantee liquidity.

Investors should expect stronger reporting, stress testing and scrutiny of redemption arrangements as the UK alternative fund regime moves toward its anticipated 2028 implementation.

The regulatory challenge is not to maximise access at any cost. It is to ensure that access terms are understandable, supportable and honest about what happens when many investors want to leave together.