Longer exit lines building at open-end real estate funds

Real estate managers of open-end funds are having a tougher time returning investor capital this cycle than in the global financial crisis, industry experts said.

Generally, the lack of liquidity in the market because of fewer transactions is the culprit, said Peter Rogers, director, investments-Americas and head of real assets research at Willis Towers Watson.

“We’ve seen a remarkably slower payout ratio of redemption queues this go around,” Rogers said.

“We’re seven quarters into negative returns and I would say, on average, the open-end funds are paying out 5% of net asset value redemptions a quarter,” he said.

In the fourth quarter of 2023 alone, investors sought a total of more than $52 billion back from domestic open-end funds, according to Townsend Group data published by the Pension Real Estate Association.

By comparison, funds in the NCREIF Fund Index-Open End Diversified Core Equity index in 2007 paid out an average of 71% of their queues each quarter, Townsend Group data shows.

“Generally, open-end funds have been very slow to pay out redemptions during the past two years,” Rogers said.

All of the large open-end funds have queues, said Cathy Marcus, co-CEO and global chief operating officer of PGIM Real Estate.

Documents for open-end funds generally give managers wide discretion on redemptions based on liquid assets available needed to fund operating expenses, debt service and other things, according to the Townsend report.

“Everyone has been paying out a bit each quarter and slowly making a dent in those queues,” Marcus said.

More recently, PGIM has seen the number of investors rescinding their redemption requests increase, she said. PGIM has not offered incentives to investors to rescind, she said.

Cancellations started in the second half of last year and have become more common, Marcus said. The reason is that the flurry of withdrawal requests was driven by the denominator effect in which a drop in public equities and bonds pushed investors’ real estate portfolios above their target allocations, she said. The public market recovery has reversed that effect, she said.