A Real Estate Fund is an investment vehicle that enables investors to pool their funds together and invest largely in Real Estate. The funds can either be privately offered, publicly offered, or traded in a listed Stock Exchange.
According to rating agency Fitch, approximately 80 funds were suspended in Europe in March 2020, resulting from the high cash outflow and large drops in asset prices as investors prioritize liquidity and became more selective in the investment opportunities they considered, while those with existing investments looked to cash out to enhance their liquidity.
The UK economy, like the rest of other global economies, has been impacted by the ongoing pandemic making it difficult to value property owned by funds prompting the suspension of various funds. The suspension of funds is in line with the Financial Conduct Authority (FCA) guidelines, which stipulates property funds should suspend dealings if there is material uncertainty over the value of 20.0% of their assets.
Previously in the UK, property funds have blocked withdrawals due to liquidity issues resulting from the 2008 financial crisis and the Brexit vote. The Bank of England in its Financial Stability Report 2019, cited that there exists a mismatch between redemption terms and the liquidity of some open-ended funds, particularly in stress conditions and as such, to enhance consistency between liquidity and redemption terms, the bank proposed a combination of;
Longer redemption periods, and,
A system to force those leaving the fund in times of market stress to accept a discounted price for their units.
Real Estate funds have been hit by temporal liquidity challenges especially where the funds are open-ended, what the funds can do is borrow from what the other organizations are doing to preserve the value of the funds such as reducing cash payout to investors and seeking capital restructuring from investors. Below are some of the suggestions of what can be done in order to preserve value.
Suspension of withdrawals from funds- In Europe it is estimated that over 80 funds were suspended to preserve value and liquidity,
Reduced development activity to ensure the cash requirements are lower,
Suspension of fees related to real estate by the government – Some governments like Abu Dhabi have suspended registration fees for real estate as they seek to support the real estate sector,
Asset buying programs- Various governments have set aside cash to help struggling businesses,
Direct Investments into Funds- In India the government directly infused cash into the funds to help with liquidity,
Developers can seek different financiers such as Private Equity firms to finance their projects, and,
Disposal of Assets but within the prevailing market rates.
In conclusion, we believe that real estate funds will remain attractive as on the longer end they provide higher returns well above inflation and are good for diversification away from traditional asset classes such as Equities and Fixed Income.
Property prices have avoided a slump and remained relatively stable in the Kenyan markets and therefore it is key for investors to ensure that the underlying assets remain attractive. The managers of real estate funds should ensure that they do everything possible to mitigate the impact of the pandemic and to protect the underlying investments. On the other hand, investors in real estate funds need to appreciate that illiquidity during times of stress, such as the pandemic, is normal in real estate hence work together with managers to navigate the environment.