Measures outlined by the Financial Conduct Authority (FCA) to address the liquidity mismatch in open-ended property funds are expected to dampen investor appetite for the vehicle, and drive flows out of the sector in favour of property investment trusts and ETFs.
The FCA announced on Monday (3 August) its plans to bring a halt to the waves of suspensions in IA UK Direct Property recent years, which included the implementation of a notice period of up to 180 days for consumers redeeming investments.
Client director at Bowmore Asset Management Charles Incledon said the changes would mean "a lot of financial advisers will just stop recommending open-ended property funds to their private clients", while wealth managers will be "far less enthusiastic" about the funds.
He added: "The issue of private investors being unaware that they might be locked into a property fund during an extreme economic event could be dealt with by much more rigorous risk warnings on those funds.
"The FCA says that they don't think that their proposals would necessarily prevent funds having to suspend dealings in times of severe market stress. In which case, would the end result justify such a draconian measure?"
Incledon also called for further clarity as to whether the proposed notice periods would mean property funds will be excluded from Stocks and Shares ISAs.
He said: "Clearly it would be very damaging if the new rules were to go ahead and HM Treasury subsequently barred property funds from ISAs."
Head of personal investing at Willis Owen Adrian Lowcock added that the notice period will also make open-ended property funds "unappealing" to individual investors, "especially in a time when investors are used to being able to access a growing range of investments with daily liquidity".
Lowcock said: "Six months is a long time for any investment and the price you get 180 days later could be materially different from the one you expected.
"However, the notice period will help remove short-term investors and would make the asset class less volatile and less susceptible to sell-offs.
"There will be some disruption, but there are alternatives and the change should present an opportunity for investment trusts and exchange traded funds to come up with a proposition that works."
Similarly, head of funds research at interactive investor at Dzmitry Lipski questioned "what investors have to gain by sacrificing daily liquidity, given that there is a good structure for investing in illiquid assets already in place", such as investment trusts.
He added: "No structure is perfect, and the share price may still come under pressure in a distressed market, and discounts could widen.
"But on balance we still prefer the closed ended structure when it comes to less liquid assets as it gives instant access to investors' money."