Property funds

Property sales can take a long time to complete and it can be difficult to establish an accurate valuation of individual properties. So customers face certain risks when investing in property funds.

The property funds that are less likely to be exposed to volatility from an individual property or sector are:

• larger funds
• funds with a broader range of investments

Funds investing in overseas property markets may expose customers to the risk of changes in the exchange rate as well as in the underlying property value. This could mean that the value of a customer's investment falls even if the value of the fund's assets remains the same when measured in the local currency.

We’ll take all of these risks into account when deciding whether a particular property fund was suitable for a customer.

Find out more about how we approach complaints about the suitability of investments.

In some circumstances, a deferral period applies when customers try to withdraw from a fund or switch their investment into another fund.

This means that you won’t always act immediately on instructions to surrender, transfer or switch moneys out of a fund. You may instead promise to do so as soon as possible, but you have the right to delay until the end of a set deferral period (often six months).

These measures are in place because if you experience a significant increase in withdrawals from a property fund, you may need to sell properties to raise enough cash to meet those withdrawals. Property sales can sometimes take several months to complete, particularly during periods of market volatility.

The deferral period should allow you to sell properties in a considered manner and at a reasonable price.

The complaints we receive about deferral periods often relate to:

• customers not being told about them at the outset
• whether they were necessary
• how long they lasted for
• their timing

When considering a complaint about a deferral period, we’ll look at whether:

• you were contractually entitled to apply it
• you told the customer it might be applied
• the customer's position was damaged

We’re unlikely to take the view that a customer's position was damaged by the fact a deferral period might have been applied at some point if:

• it was never actually applied
• it wasn’t being applied when they wanted to withdraw or switch from the fund

To help us come to a decision, we’ll look at:

• the fund terms and conditions to see what you said about deferral periods
• what you said at the point of sale
• whether you explained the possibility of a deferral period being applied in a fair, clear way
• the product literature you gave to them

If you were already applying a deferral period when the initial investment was made, then we’ll see if you brought this to the customer's attention. 

If we find the customer told you at the point of sale that they might need access to the capital they were investing at short notice or at a specific time, we’re likely to say that the investment was unsuitable.

To uphold a complaint, we’ll need to be satisfied that the customer wouldn’t have invested in the fund if you’d made them aware that a deferral period could be applied.

In some cases, you may change how you calculate the price of the units in a property fund. Pricing is usually based on an inflow basis to reflect the fact that the net flow of cash to the fund is positive or neutral.

But if there’s a prolonged period when more investors are leaving a fund than entering it, you may switch to outflow pricing, designed to reflect the costs of selling property. This can reduce the unit price by as much as 5% to 10%.

The complaints we receive about switches to outflow pricing often relate to:

• customers not being told about them at the outset
• whether they were necessary
• their timing

In these cases, we’ll consider whether:

• you were contractually entitled to make the switch
• you told the customer that it might happen
• the customer's position was harmed

We’ll only agree that it was reasonable for you to switch to outflow pricing if you had a contractual right to do so. So we’ll examine the fund terms and conditions to see what you said about outflow pricing.

We’ll also look at the evidence we have about what was said at the point of sale, to establish whether you explained the possibility of a switch to outflow pricing clearly.

To uphold a complaint, we’ll need to be satisfied that the customer wouldn’t have invested in the fund if you’d made them aware of the possibility that the pricing basis of the fund might change.

If we think that a customer's circumstances made them particularly sensitive to volatility, we might say that the possibility of a switch to outflow pricing made the fund unsuitable.

Case study: Business switches pricing basis but customer warned of risk.