Investors struggle to reap the benefits of liquidity offered by European non-listed property funds

The majority of European non-listed real estate funds is designed to allow investors to exit their investments, according to an INREV study.

The INREV Liquidity Provisions Study found that 89% of institutional funds offered investors an exit route whether through redemptions or trading or a combination of both. These provisions are often irrespective of whether the fund is closed ended or open ended.

Value added funds offer the most liquidity with around 94% including exit options but core funds are not far behind at 84%. Opportunity funds are the most illiquid style with just 3% offering exit options. This style of fund is designed to have a shorter lifetime which results in fewer structural liquidity requirements from investors.

"The results refute the view that non-listed real estate funds can not provide liquidity for investors. They also demonstrate that there is a spectrum of liquidity across the funds universe rather than clear-cut distinctions between open-ended and closed ended funds. The design of liquidity provisions is clearly individual to funds rather than categorized solely by structure," says Lisette van Doorn, CEO of INREV.

Recently investors have reviewed early exit routes for their fund investments as they wrestle with allocation issues. However, in practice investors have found it difficult to exercise these liquidity provisions. "There is more pressure on investors to reduce property allocations due to the denominator effect or to re-balance allocations within their property portfolio," said Andrea Carpenter, Director of Research and Market information for INREV. The denominator effect is where an investor becomes overweight in real estate due to values of its bonds and equities portfolios falling.

"However, investors are often perceived as being 'distressed sellers' if they look to trade now resulting in different pricing expectations between buyers and sellers. Meanwhile, fund managers offering redemptions have been under pressure to meet requests from investors at a time when liquidity is more likely to be insufficient."

Just 22 funds out of a potential 127 experienced trades in the last 12 months. These totaled €655 million but funds said they expected increased trading in the future. In addition, 14 out of 51 funds experienced redemptions which amounted to €571 million but the funds expected less redemption activity going forward.

The interest in exit routes from investors now could stimulate higher use of liquidity provisions in the future. As investors become more familiar with the possibilities of exercising liquidity options it could result in more activity in the long term and a larger and more formalised secondary market. Investors interviewed for the study said the development of a secondary market was important.

"Recent market conditions have forced investors to learn more about the practicalities and the potential benefits of being able to redeem or trade shares in funds. This experience could increase the interest in and appetite for liquidity in non-listed property funds when market conditions are more stable," said Bernhard Berg, CEO of Generali Deutschland Immobilien and a member of the INREV Management Board.

The survey received responses from 160 funds, which represents 33% of the 468 funds in the INREV Vehicles Database. The sample totaled €91.1 billion of GAV or 38.5% of the value of the funds in the database. In addition interviews were conducted with nine European institutional investors and four investment banks. The survey was undertaken by the Real Estate Management Institute of the European Business School.

Source: INREV

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