LONDON (Reuters) - New rules proposed by a British regulator to avoid fire sales of commercial real estate by open-ended investment funds may not be enough if the sector increases in size, the Bank of England said on Wednesday.
Commercial real estate was the financial sector most hit by turbulence after June 2016's Brexit vote, as open-ended funds allow investors to withdraw money at short notice, but their assets such as office blocks are hard to sell in a hurry.
In 2016, several funds had to block investors' ability to withdraw funds, and the Bank of England said their structure risked creating a domino-effect of property sales.
"These funds had a structural liquidity mismatch which, in a stress, could create a first-mover advantage, high levels of redemptions and therefore fire sales of assets," the BoE said.
Britain's Financial Conduct Authority has suggested measures to suspend investors' ability to withdraw money from commercial real estate funds during periods of market turbulence, to stop funds and investors jumping the gun and trying to be the first to cash out.
However, the BoE's Financial Policy Committee, which monitors risks to Britain's financial system, said the new rules might not go far enough if open-ended fund investment made up a greater share of the commercial property market.
"On balance, the Committee concluded that, provided they were implemented as intended, the FCA's proposed reforms were beneficial to UK financial stability," the FPC said in a record of its most recent policy meeting discussions.
"But if open-ended commercial real estate funds continued to grow in importance in the UK ... the FPC agreed it should revisit the issue."
Open-ended commercial real estate funds currently make up 5 percent of investment in British commercial property.
Further action by regulators could include structural changes such as requiring longer minimum redemption terms.
The BoE noted that similar funds in Germany required investors to hold assets for at least two years, and to give a year's notice to withdraw money.
However, the BoE said Britain's finance ministry had opposed tighter rules, as commercial real estate funds were available to consumers who expected to be able to withdraw money at short notice, and "there was a strong desire to avoid unnecessary complexity".
Last week the BoE's Financial Policy Committee urged the European Union to do more to protect cross-border financial services from the risks of a "cliff-edge Brexit", saying the need for action was now pressing, less than six months before Britain is due to leave the bloc.
The FPC itself was set up in 2013 in a revamp of British regulators following the global financial crisis, and is tasked with monitoring risks to the financial system as a whole.
(Reporting by David Milliken and Huw Jones; firstname.lastname@example.org; +44 20 7542 5109)