'Distressed' tag prevents investors using non-listed fund exit

The majority of European non-listed real estate funds are designed to enable early exit, but investors are being held back from exiting by the fear they will be labelled as distressed sellers, and will consequently have to sell their stakes at a hefty discount.

That is one of the key conclusions of a new Liquidity Provisions Study produced by the European Association of Non-Listed Real Estate Funds (INREV). The 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 or open ended. Inrev said 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.

'The results refute the view that non-listed real estate funds cannot 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 categorised solely by structure,' said 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. 'Investors are often perceived as being 'distressed sellers' if they look to trade now, resulting in different pricing expectations between buyers and sellers,' said Andrea Carpenter, director of Research and Market information at Inrev. '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 totalled EUR 655 mln but funds said they expected increased trading in the future. In addition, 14 out of 51 funds experienced redemptions which amounted to EUR 571 mln but the funds expect less redemption activity going forward, the report found.