Two thirds of non-listed real estate funds scheduled to terminate between 2011 and 2013 will be extended, according to the recent INREV Fund Termination Study 2011. But investors are keen to engage with fund managers much earlier over their fund termination strategies.
The study revealed a continued trend from last year toward delaying decisions about fund termination. Some investors felt this was being driven by fund managers' deliberate attempts to make the decision to extend a fund the only viable option.
Furthermore, a number of investors perceived that the decision to extend a fund was motivated more by fund managers' desire to maintain fee income than by what may be in the best interests of the investors.
Fund managers, on the other hand, cited the need to allow time to consider all the termination options as the main reason for delaying a decision, with 56% of funds due to terminate between 2011 and 2013 falling into this category.
"This is an interesting revelation. It suggests that, while not a universal theme, there is a level of disconnect between investors and fund managers, with some investors feeling cornered. The study implies that investors and fund managers could benefit from more transparent conversations around fund termination decisions; and a much earlier start to their discussions on the subject," said Lonneke Löwik, INREV, Director Research and Information.
A majority of the funds opting to continue beyond their original termination date were aiming at extensions of between one and three years. But 32% of funds surveyed said they would seek to liquidate.
Holding on to assets
Of the funds that decided to terminate, the majority were disinclined to dispose of assets. Both investors and fund managers expressed the desire to keep hold of high quality assets, because of the uncertainty over current market conditions.
However, a number of investors were keen to explore the option of retaining their assets outside the framework of a fund, for example, through joint ventures, club deals or direct ownership, denoting an interesting shift in approach.
Changes in strategic direction
The study also examined trends in termination strategies looking back to 2006, when the first INREV Termination Study was conducted.
It revealed that between 2009 and 2011 nearly 60% of funds changed their termination plans at least once. The most common change was from an extension to liquidation, reflecting the peaks and troughs of different markets. However, none of the funds with original termination dates in 2009-2010 changed their strategies from liquidation to extension.
Fund-specific factors and investor preferences were important influencing factors; but prevailing market conditions (and particularly an uncertain economic outlook) were the key reason most funds changed their termination strategies.
Of the funds originally due to terminate in 2009 or 2010, 15% had stated they would pursue a termination strategy of liquidation, but none had disposed of all their assets within the original lifetime of the fund.
"This trend demonstrates how investors and fund managers inject a powerful dose of pragmatism when it comes to deciding the ultimate termination strategy for their funds, despite the guiding principles laid down in the fund documentation at the outset.
"The fact that a number of changes to strategy are made along the way also shows how investing in a closed-ended fund doesn't necessarily mean investors will know exactly when the fund will terminate; or when or whether capital will be returned," added Lonneke Löwik.
Source: Firstlight PR