This Is Guernsey

By Tom Edwards

GFSC director general Peter Neville.

THE GFSC has defended Guernsey against criticism that ‘unauthorised’ UK commercial property funds have left investors with big losses.

Business news website breakingviews. com reported that some £40bn had been ploughed into unregulated investment vehicles, most of which were registered in Guernsey and Jersey.

The investors had been attracted by the combination of tax advantages and the ability to borrow heavily, as the funds were not regulated by the UK Financial Services Authority. However, since the market turned in 2007, gearing has contributed to some ‘nasty losses’, according to breakingviews.

GFSC director general Peter Neville said that such funds should always be seen as a long-term investment.

‘The property sector is subject to volatility and investors may be subject to both gains and losses,’ he said.

‘The experience of some property funds is not dissimilar to the experience of many funds over the last six to nine months as a result of the global credit crisis.

‘Due to the variety of property types invested into by Guernsey funds and the methods of operating such funds, the individual experiences of many funds cannot be compared.’

A lack of liquidity had resulted in some UK property funds either limiting redemptions or not allowing immediate redemption of shares so that assets were not sold at depressed value, Mr Neville added.

According to the website, Capital & Regional’s £600m. Junction Fund, which invests in the struggling DIY warehouse sector, has geared 111% and fallen 34%. Similarly, Henderson’s Retail Warehouse Fund is down 21%.

The falls have not had much impact on the wider market because most offshore funds are closed-ended and consequently offshore managers don’t need to sell assets quickly to repay disgruntled investors.

As of 30 September (the latest available figures) there were 123 Guernsey closed-ended investment funds investing in property, with a net value of £13bn.

There were 27 open-ended collective investment schemes of the same class asset, worth £3.6bn.

The latter are regulated under the protection of investors law.

‘Amongst the requirements are rules that require disclosure of the maximum level of gearing that the fund may enter into,’ said Mr Neville.

‘It is also a requirement that suitable risk warnings are included in the scheme’s prospectus such that potential investors are adequately informed of the risks to which the scheme is exposed.’

Closed-ended investment funds are not currently regulated under the law, but this position is not dissimilar to the UK’s regulatory approach, he added.

‘However, closed-ended investment funds are required to obtain consent under The Control of Borrowing (Bailiwick of Guernsey) Ordinance 1959 and as part of the application process the funds must demonstrate that adequate disclosures, including the fund’s capacity to gear, are made in the fund’s prospectus.

‘In addition listed investment funds are subject to similar disclosure requirements.’

Article posted on 11th March, 2008 - 2.30pm