Open-end real estate funds will continue to fall, fund manager warns

Open-ended funds have been falling since 2016 and this should continue according to Gravis fund manager Matt Norris.

He points out that assets under management for this class rose from £22 billion to £9.1 billion between May 2016 and March 2022.

Norris, director of real estate securities, said this decline is expected to continue.

“What we can say, given the evidence, is that they are in decline and will continue to decline,” he said. Money Marketing.

One of the reasons for this decline according to Norris is the lack of liquidity in open-ended real estate funds.

He said: “It probably goes back to some of the things the Financial Conduct Authority has said about owning a very long-lived asset in a fund that provides daily cash.

“If investors want their money, it takes time to sell the asset. If investors subscribe money, it takes time to buy the asset. There is definitely a liquidity mismatch.

The regulator has published a long-term asset fund consultation in October last year.

Another problem for open-ended real estate funds was their outperformance through 2016.

Norris said: “Let’s be fair, direct real estate funds have generated positive returns on average.

“Over the past decade, direct real estate funds have actually made you a little more money than investing in Gilts.”

Additionally, Norris believes that open-end real estate funds have not invested in the best performing parts of real estate.

He said: “Self-storage is one of the most successful real estate assets. Direct real estate funds are not exposed to self-storage.

“The purpose-built student accommodation has worked very well. Again, direct real estate funds have no or no significant exposure to this.

“They probably also have a little too much retail.”

Janus Henderson UK Property PAIF has recently confirmed that it has agreed to sell its property portfolio.

L&G UK Property suffered in March due to the “low probability” of property purchases.

Real estate is financing particularly badly during the Covid shutdowns and after the Brexit vote in 2016.