Watchdog warns on risks of property funds

Britain's financial watchdog yesterday warned punters piling into funds invested in property they could get their fingers burned because many do not understand the risks of the vehicles.

The Financial Services Authority is nervous about the sudden take-off of property funds because it believes some funds' characteristics, such as high levels of gearing, are similar to the decimated split capital investment trust sector.

Sir Howard Davies, the chairman of the FSA, said: "The complexities of a packaged investment product and the associated risks may be far from transparent and there is ample scope for retail investors to fail to understand the risks involved."

The FSA said its concerns surrounded both residential and commercial property funds, after anecdotal evidence that some financial advisers are encouraging clients to buy into them as a refuge from dismal stock market returns without understanding the risks.

The FSA said it would now conduct a survey of funds on offer, the risks involved and how much financial advisers understand about these products.

Property was the asset that investors felt was most likely to perform well in 2003, according to a recent survey by the Association of Investment Trust Companies.

The warning came after evidence from the housing market in recent weeks that the property price inflation of recent years is slowing and in some areas such as London values are beginning to fall.

The FSA mooted the idea of splitting property investment funds into two categories. One could have light regulation and only be for more sophisticated institutional investors while the other could carry lots of warnings and be for retail investors.

Separately, the FSA signalled its willingness to move forward its plan to shake up the with-profits industry, putting Ron Sandler's review of the sector out for consultation for the next three months.

Mr Sandler floated the idea that with-profits investments could have a 60 per cent cap on the amount of the fund in equities and suggested that shareholders funds should be kept separate from money belonging to policyholders in order to avoid conflicts of interest.