UK-regulated open-ended property funds offer daily redemptions to entice investors, but nearly all those targeted by Monday's proposal are suspended following market volatility in March due to the pandemic, trapping more than $7.5 billion (5.7 billion pounds) in assets.

Policymakers have warned that property funds should not be viewed like a bank account that can be tapped at will, given they contain "illiquid" assets such as commercial real estate that can take several months to sell even in normal market conditions.

Concerns over daily redemptions began when several property funds were suspended after Britain voted in June 2016 to leave the European Union, as investors pulled out money.

The Financial Conduct Authority (FCA) proposes that property funds publish a "notice period" or irrevocable pre-agreed gap of between 90 and 180 days from the request for a redemption to the return of cash.

It would affect new and existing customers, but also mean that property funds don't have to hold as much cash as they do now, the FCA said.

The public consultation is open until Nov. 3 and the watchdog said it would publish final rules as soon as possible in 2021.

The Association of Real Estate Funds said the consultation was an opportunity to reflect on ensuring that the funds continue to meet the needs of investors.

Investment platform Willis Owen, however, said the change would make property funds unappealing for many investors.

Concerns over daily redemptions also surfaced in March at money market funds, and last year when a flagship equity fund run by then star stockpicker Neil Woodford was suspended.

But these types of funds are mainly domiciled in Luxembourg, Dublin and elsewhere in the EU and are regulated under European Union rules. That makes it hard for the FCA to unilaterally impose stricter requirements without international regulatory consensus.

The FCA and Bank of England are expected to give an update on Thursday on their broader work on illiquid assets and potential systemic risks in open-ended funds.

(Reporting by Huw Jones; Editing by Alison Williams/ Gareth Jones/Susan Fenton)

By Huw Jones