A potent mixture of public market declines and investor sophistication is starting to eat away at open-end real estate fund managers' lunches.
Net inflows into open-end real estate funds dropped 25% to $8 billion in the second quarter from the $10 billion in each of the prior two quarters, said the Investment Company Institute's second quarter report — its most recent. While inflows are up from the second quarter of 2015, net inflows had dropped 16.6% in the third quarter of last year.
What's more, open-end fund managers are seeing their first exit queues — despite the net inflows — since 2010. This is a big change for open-end funds that were the post-crisis darlings when investors tilted their portfolios toward core real estate and lined up to invest.
Redemptions and distributions of funds in the Open End Diversified Core Equity index rose in the second quarter to $12.8 billion, offset by $18.3 billion in contributions on a four-quarter rolling basis, according to data from the National Council of Real Estate Investment Fiduciaries, Chicago. Redemptions and distributions were up 26% from $10.1 billion in the first quarter and up 80% from $7.1 billion in the second quarter of 2015.
“We're in a position where the large majority of funds don't have large incoming queues and many don't have incoming queues at all, and some funds are beginning to form redemption queues to get out,” said Peter Rogers, a Chicago-based senior investment consultant and head of Americas real estate research for consulting firm Willis Towers Watson PLC, Chicago. “We're eagerly awaiting the third-quarter redemption numbers to see if indeed rebalancing or redemptions continue, indicating a bigger shift.”
Managers of open-end funds say some of their investors are moving capital out of their funds to rebalance their overall portfolios as falling public markets push real estate allocations near or over their targets.
“We did see some rebalancing in the first half of 2016,” said Joseph K. Azelby, managing director and CEO, global real assets in the New York office of J.P. Morgan Asset Management. This resulted in outflows from some of JPMAM's open-end funds, but JPMAM executives declined to reveal the exact amount of open-end fund inflows and outflows.
Sources with knowledge of the situation said that in the third quarter J.P. Morgan's $30.6 billion core open-end fund had an exit queue of close to $300 million — but also an entry queue of about $600 million. J.P. Morgan's $3.5 billion value-add open-end fund has no exit queue and an entry queue of about $100 million, the sources said.
“We continue to see solid inflows,” Mr. Azelby said. “We see everything from the traditional pension funds still adding to their core real estate allocations and we still see investors relatively new to the real estate space coming into our (open-end) real estate funds.”
Willis Towers Watson's Mr. Rogers agreed that some of the redemptions are due to rebalancing, but he is keeping an eye on the trend.