Property funds (2024)

Property funds are investments in commercial property, for example, offices, factories, warehouses and retail space. Customers make lump-sum investments, which are pooled together and used to purchase a range of assets, invested in two ways:

• directly in commercial property
• indirectly, by buying shares in property companies or other property funds

Property funds can differ from other ‘collective investment’ funds because:

• there can be delays between a customer asking to withdraw money from a property fund and that money being paid out
• the pricing of the units can be complicated

We can’t usually look into complaints where customers have invested directly into property themselves or have control over the underlying investments because these activities are not regulated.

Types of complaint we see

Examples of complaints about property funds we deal with include:

• the fund was unsuitable for the customer
• there was a delay when withdrawing money
• the customer wasn’t told about a deferral period from the outset
• there was a change to the investment valuation.

What we look at

For us to be able to investigate, the complaint must be about a ‘regulated activity’ as defined by the Financial Conduct Authority (FCA) Handbook.

If the customer has control over the property held by the fund, it’s unlikely we’ll be able to consider the complaint.

If a customer has been advised to invest directly in property within a self-invested personal pension (SIPP), we might be able to look into the complaint against the adviser.

Find out about what we look at in more detail:

• Suitability of 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.

• Delays when withdrawing money

  In some circ*mstances, 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.

• Changing to the pricing basis

  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 circ*mstances 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.

Putting things right

When we’re satisfied that a particular fund was unsuitable for a customer, we may decide they can be paid compensation for their loss. There are a number of approaches to calculating compensation.

We’ll look at the individual circ*mstances of each case and decide what we think the customer would have done if they hadn’t invested in the fund.

If a deferral period is in place, it could be difficult to calculate an accurate surrender value. In some circ*mstances, we’ll ask you to waive the deferral period. If that’s not possible, we’ll ask you to take ownership of the customer’s investment and pay the customer the amount that was originally invested with an appropriate rate of return.

Find out more about our approach to awarding compensation for investment complaints.

Case studies