13 November 2023
If you are covering the suspension of another property fund, the TIME Freehold fund, please find below a comment from Oli Creasey, property research analyst at Quilter Cheviot:
“The TIME Freehold fund has today announced a suspension in trading. While this is another open-ended, daily dealt property fund going into suspension, the causes underlying the move are quite different compared to the funds that found themselves in trouble last month.
“The TIME fund invests predominantly in residential freehold properties (collecting ground rent from very long-dated ground leases), an area where regulatory changes have been a concern for some time. However, last week the Government announced a formal consultation into how leasehold arrangements should be handled, which included the risk that all residential ground rents could be capped at a relatively low figure, or even permanently reduced to a nominal fee, such as a peppercorn.
“Several hundred years ago, the peppercorn was a valuable, rare spice, but the term has morphed over time to refer to a very small value amount, which almost always goes unpaid by the leaseholder.
“Such a change to the freehold/leasehold landscape would be hugely impactful on the values of freehold investments, and although it is too early in the consultation phase to have any indication of what the outcome might be, the risk of the ground rents being reduced or effectively eliminated is being taken very seriously. As a result, BNP Paribas, the independent valuer of the freehold fund, have activated the Material Uncertainty Clause (MUC), stating they cannot confidently value the freehold assets given the regulatory landscape, and that as a result it would be unfair to investors to set a NAV for the fund at which units could be bought or sold (as that NAV could prove to be badly wrong).
“The MUC is a relatively new tool in the open-ended fund world, first used in anger across the property fund class in March 2020, when just about every property fund closed on the same day (as the onset of Covid made property valuation an impossible task at the time).
“It should be noted that the suspension is not a result of any action by the managers at TIME, who have maintained appropriate liquidity levels and delivered consistent returns over the past years. It may also be the case that the consultation concludes with a much less impactful outcome and the fund is able to reopen without suffering a significant hit to NAV.”
