In the current market, fund managers and investors tend to opt for fund extensions when evaluating fund terminations according to the latest INREV study. Launched at Expo Real, the Fund Termination Study shows even more clearly than last year that continuation is now the most likely outcome when evaluating fund termination.
Nearly two thirds of funds (59%) due to terminate in 2009 - 2011, decided to continue the fund 88% by extension and 12% by rollover, rather than to terminate. This equates to 15.8 billion in Gross Asset Value. Although investors are also seeking more liquidity in today's market they have shown their support in the continuation of funds. The current challenging conditions in the European real estate market are the main reason why many investors and fund managers have decided that now is not the best time to sell assets.
The trend for continuation is simultaneously surprising and unsurprising. Fund managers and investors alike would currently prefer to continue in order to recoup their capital as the market recovers. However, this does not mean that all investors would prefer not to terminate now as some have their own liquidity issues or because of debt or other issues in the fund. Some investors are forced to stay invested in funds they would prefer to exit due to difficulties in liquidating at prices acceptable to the other investors.
There is clear trend for an increasing need for information. Investors who are supporting the continuation of funds are also seeking more information and preparation from their fund managers. While liquidation might not be the preferred route, investors indicated that they would like to see a business plan for all assets, which also explores selling some assets in the current market.
Lisette van Doorn, CEO, INREV, said: "Continuation is again the most frequently used termination option, similar to last year. It is absolutely clear that fund managers and their investors are working very closely to achieve the best outcomes for each fund taking into account the very few real alternatives available in the current difficult market. While in the last few years, the termination decision was heavily influenced by the scarcity of re-investment alternatives, this is less of an issue right now. Trust in the fund manager as well as issues at investor level, such as the need for liquidity, play a much more prominent role in the decision making process of investors."
Where funds had decided to continue, a relatively short extension of 1-3 years was favoured. Extension is preferred over rollover as investors have to treat the latter as a separate investment decision based on its own new business plan from the fund manager. A number of the investors interviewed explained that these short extension periods reflect uncertainty about the timing of an economic upturn and the time it takes to sell assets. It was also noted that such periods might well need to be extended again given the current high cost of refinancing.
Lonneke Lowik, INREV's Director of Research and Market Information, added: "With the current market uncertainty, the termination decision making process has also become much more complicated with investors in a particular fund possibly having very diverse views on the future of the fund. This also means that more funds opt for a short term continuation in order to 'buy' time until the market has become more stable and the future opportunities become clearer."
Indeed, the level of continuation would probably be higher still if it were not for the fact that investors have their own liquidity issues and that fund refinancing can be difficult due to the issues in real estate funding by banks. 53% of fund managers stated that the debt issues within their funds was important when considering fund termination and 41% felt similarly strongly about the availability of refinancing. In fact, these fund refinancing issues are likely to jeopardise plans for continuation in a number of cases.