UK regulator highlights liquidity risks in property funds

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UK property fund liquidity risks

Highlights

The FCA finds a liquidity mismatch in UK property funds, with 10% of net asset value redeemable in 30 days but only 7% of assets actually liquid.
The FCA review shows leverage and liquidity risks are concentrated in specific fund types, particularly private credit assets, which are projected to more than double to 335 billion pounds by 2025.
Hedge funds contribute a disproportionate share of sector leverage due to derivative use, and a persistent group of highly leveraged funds remains in the market.

FCA review points to pressure in real estate funds

As reported by Reuters, the Financial Conduct Authority's analysis of more than 11,000 alternative investment funds available to UK investors finds no market-wide liquidity shortfall, but identifies a mismatch in property funds. The review shows 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 under close regulatory attention since several UK vehicles suspended withdrawals after the 2016 Brexit referendum and again during COVID-related market disruption. The FCA says the review also exposes shortcomings in current reporting requirements and helps shape its proposed reforms for alternative fund manager regulation.

FCA Chief Economist Kate Collyer says the analysis gives the regulator a clearer view of how this part of the market is changing, where it is expanding, and where risks may be building.

Broader non-bank finance risks stay in focus

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

More broadly, the FCA data shows leverage and liquidity risks are concentrated in specific fund types rather than across the whole sector. The analysis highlights rapid growth in private credit, where assets more than double since 2021 to 335 billion pounds in 2025, while only a small number of private equity and private credit funds show a potential liquidity mismatch.

Hedge funds account for a disproportionate share of leverage in the sector, reflecting extensive use of derivatives rather than outright borrowing. The FCA also notes that a persistent group of highly leveraged funds remains within the market.

Our earlier article on private equity performance and investor access explained why exclusive private-market products are facing growing scrutiny as recent returns have lagged cheaper public market benchmarks. It highlighted key investor risks such as high fees, limited liquidity and the added pressure of higher interest rates on leveraged deal-making, even as the asset class continues to argue for long-term diversification benefits.

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