A number of real estate fund investors are defaulting on capital calls or asking fund managers to delay them as they look to rebalance portfolios and generate liquidity.

Reports in the press have already highlighted a growing trend among limited partners in private equity funds to seek to negotiate out of their capital commitments, but now the closed-ended real estate funds sector seems to be undergoing similar pressures.

"We have experienced some of these issues already in a few funds where we have seen limited partners who were not able to pay their capital calls," said Michael Nielsen, head of real estate at Denmark's largest pension fund ATP. "We have also seen investors who try to convince managers to postpone capital calls."

It is in the interest of ATP, limited partner in a number of European and US unlisted real estate funds, for all fellow fund investors to abide by their capital commitments.

Nielsen is not overly concerned at the situation as it stands, because so far only he has only seen "quite small investors" experience difficulties. He would be more concerned, however, if limited partners with larger stakes in funds were to default or put pressure on general partners to postpone capital calls.

"It is more crucial if larger investors default," Nielsen said. "But we haven't seen anything like that."

Volker Wiederrich, chief investment officer at fund of funds manager Swisslake Capital, believes the counterparty risk of other limited partners is an issue for all real estate fund investors today.

"It is definitely a topic, not only that you know the management of the fund, but indeed that you also know who are the other investors," he said.

The consequences of a limited partner defaulting varies between funds and so Wiederrich said fund managers and limited partners have been compelled to "read their prospectus again" over the last two months.

"Many investors and fund managers have never thought about something like that over the last, say, five years," he said.

The situation is also likely to lead to increase in secondary trading of stakes in closed-ended funds.

Nielsen and Wiederrich both noted they had already witnessed a growth in secondary market activity and were monitoring the space for potential investment opportunities.

Further analysis of this issue will be available in the March/April edition of IPE Real Estate.