Real estate funds are under scrutiny for a lack of liquidity in some vehicles. A “structural vulnerability risk” exists in the real estate funds sector, according to a recent report by the European Securities and Markets Authority.
Many funds offer daily liquidity while the assets they invest in are not liquid. The International Advisory Board for Fund Selection also raised concerns recently regarding daily liquidity, especially in real estate funds.
As board member Andrew Clare highlighted, most people know they can’t wake up in the morning and sell their house by midday.
“But investors expect to have daily liquidity in their property portfolio – that is, the option to complete commercial property transactions in a day,” Professor Clare said after a board meeting in Madrid earlier this year. “To have daily liquidity in property funds is just nonsensical. Of all the asset classes, it’s probably the biggest mismatch between product and underlying asset there is.”
M&G Real Estate predominantly manages direct property funds. Peter Riley, the firm’s head of capital solutions, says these strategies are designed to provide investors with what they need. M&G’s flagship property fund was gated last year due to sustained outflows.
“Our funds, in general, are open-ended, so essentially investors vote with their feet,” he adds. “If they’re not happy with the performance, or the way in which a fund is managed, then ultimately investors will walk away. Assets need to be evaluated whether they are robust and have a long-term role, or whether they need to be rethought.”
But real estate and infrastructure are flavour of the year, according to Francisco Da Cunha, real estate tax leader at Deloitte Luxembourg and chair of a Luxembourg funds industry real estate working group, and many funds are re-addressing strategies to adapt to the “ups and downs” in sectors like retail and office sub-sectors.
“Little by little, firms are letting go of multi-sector strategies – but this also depends on geography,” Da Cunha says. “One way to avoid liquidity issues leading to fund suspensions is for firms to plan ahead in the fund incorporation phase as regards any perceived financial or political sensibilities with the sector and strategy they are planning to invest in, so as to tailor their commitments and investments accordingly.”
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