The Association of Real Estate Funds (AREF) has assessed the impact of the Brexit vote on the UK real estate market and its funds industry.

The study, based on interviews, found an “overwhelming preference” for fund suspension to a general sale of assets at distressed prices.

John Forbes – an independent consultant who wrote an influential AREF report in 2012 – was last year asked to reassess the sector after the UK’s referendum result.

Trading suspensions in open-ended property funds were widely attributed to the uncertainty caused by the Brexit vote on 23 June. Many of the funds subsequently reopened.

Although there were specific areas in which managers did not handle matters as efficiently as they could have done, the approaches adopted by managers limited the impact of events, the report concluded.

More intermediaries interviewed for the study favoured redemptions – as long as the price fully reflected the consequences and prevented dilution of remaining investors.

The report pointed out that because intermediaries did not know which route managers would – or indeed could – follow, many found themselves in funds that did not do what the investor would have preferred.

Some managers who did suspend funds were, the study found, strongly of the view that more widespread forced sales of assets by open-ended funds would have turned a fund liquidity issue into a “full-blown property crash”.

The report also said that there was a “lack of clarity, consensus, and regulatory certainty as to the approach to valuation of assets in periods of volatility”.

“Confidence in the valuation of underlying assets is fundamental to open-ended funds,” the study said.

Many investors were effectively paying a high cost for liquidity that they did not use, the report found. Returns were eroded by funds holding cash balances to meet redemptions and by some investment assets being selected on the basis of perceived ability to sell them quickly, rather than anticipated investment performance.

“Listed vehicles also have drawbacks,” the report added.

“A range of measures to permit the development of a broader range of listed and unlisted vehicles with different liquidity characteristics would give retail investors greater choice,” the report said. “An environment that allowed an evolution of a broader range of real estate products would allow investors to sacrifice liquidity to reduce volatility and improve performance if they wish.”

Although there were undoubtedly significant flaws in the overall structure for retail investment in real estate, an enormous amount of care was needed in changing this, the report concluded.

“Introducing regulatory changes that prevent daily trading in retail real estate funds could have a catastrophic effect if investors are forced to redeem their holdings as a consequence,” the report said. “Moreover, there is nothing to suggest that the concept of a daily traded fund is wrong.”

The issues were, AREF said, in the detail of how the mechanisms currently operate, the lack of clarity for investors as to how different fund managers will behave in particular circumstances, and the lack of choice for retail investors who do not want daily liquidity.

Removing regulatory and operational obstacles is regarded as a significantly safer route than a rapid intervention and triggering a greater shock than occurred after the referendum vote.

AREF proposed a jointly managed review of this idea, including AREF, the Royal Institute of Chartered Surveyors, the Financial Conduct Authority, and the Depositary and Trustee Association.

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