UK Property Funds Face Liquidity Mismatch Risks

The regulator’s analysis of over 11,000 alternative investment funds reveals that while the broader market remains stable, property funds continue to struggle with the friction between investor liquidity and the slow pace of real estate transactions. This tension has been a persistent concern since the 2016 Brexit referendum and subsequent pandemic-era market shocks forced several funds to freeze withdrawals.

Beyond property, the FCA report identifies significant growth in private credit, which has more than doubled since 2021 to reach £335 billion. While the sector is largely dominated by a few major players, the regulator noted that a minority of these funds maintain high leverage levels. Hedge funds also show elevated leverage figures, though the FCA clarified that this is largely driven by the use of derivatives rather than traditional debt. Chief Economist Kate Collyer stated that these findings are critical for shaping upcoming reforms and identifying where systemic risks are accumulating in the non-bank financial sector.