UK regulator flags liquidity risks at property funds

By Phoebe Seers

LONDON, Sept 3 (Reuters) - An analysis by the UK financial watchdog found liquidity risks are concentrated in real estate funds, reinforcing the regulator's long-standing scrutiny of a sector where investors can withdraw money more quickly than underlying properties can be sold.

The analysis by the Financial Conduct Authority of more than 11,000 alternative investment funds available to UK investors found no market-wide liquidity shortfall. But it found that 10% of real estate fund net asset value could be redeemed within 30 days, compared with 7% of assets estimated to be liquid over the same period.

Property funds have been a focus for the regulator since several UK funds suspended withdrawals after the 2016 Brexit referendum and during COVID-related market disruption.

Regulators globally are scrutinising risks in non-bank finance. The Financial Stability Board has identified liquidity mismatches in open-ended funds as a potential source of market stress and has proposed reforms aimed at reducing vulnerabilities during periods of heavy redemptions.

The FCA said the review highlighted shortcomings in existing reporting requirements and informed its proposed reforms for alternative fund manager regulation.

FCA Chief Economist Kate Collyer said: "Having this insight helps us understand how this important market is changing, where it is growing, and where risks may be building."

More broadly, the data showed leverage and liquidity risks were concentrated in particular fund types rather than spread across the sector. The study also included hedge funds, private equity and private credit funds. 

The analysis highlighted the rapid rise of private credit, where assets have more than doubled since 2021 to £335 billion ($452.15 billion) in 2025, although it remains a relatively small part of the wider alternative investment fund market.

The FCA said assets were concentrated among a relatively small number of large private credit managers and although the share of sector assets accounted for by highly leveraged private credit funds has fallen since peaks around 2020, a persistent group of highly leveraged funds remains within the market, the regulator said.

 Only a few private equity and private credit funds showed a potential liquidity mismatch, the regulator said. 

Hedge funds accounted for a disproportionate share of leverage in the sector, although the FCA said much of this reflected the extensive use of derivatives rather than outright borrowing.

($1 = 0.7409 pounds)

(Reporting by Phoebe Seers; Editing by Cynthia Osterman)