There are some investing lessons that are obvious, but never seem to be learned. “Don’t expect instant liquidity from illiquid assets” is pretty high on this list.
Yet several open-end real estate funds are again limiting redemptions – just as they did in 2016 and 2020 – due to too many investors trying to withdraw their money too quickly.
On this occasion, only institutional funds (ie those used by pension schemes) seem to be affected, unlike the last time when retail investors also locked themselves in. However, it’s not hard to imagine that retail funds could eventually limit withdrawals, if the housing downturn continues amid higher interest rates and a weak economy.
MoneyWeek has made its point many times in the past: We simply see no good reason to invest in open-ended real estate funds that promise easy liquidity, because that liquidity will always disappear when investors need it most.
In contrast, listed real estate investment trusts (REITs) continued to operate as expected. If you want to sell, you can sell anytime the exchange is open. If you want to buy, you can buy.
Price in a lot of gloom
Of course, prices have come down a lot this year. Among large office and retail buildings, British Land is down 37% year-to-date and Land Securities is down 34%. London office specialist Derwent is down 43% and its counterpart Great Portland down 38%. Capital & Counties and Shaftesbury, which own large swaths of London’s West End and are due to merge later this year (Competition and Markets Authority permitting), are down 41% and 44%. Even logistics real estate, the darling of the market in recent years, are at sea: Segro is down 47%.
But it’s the market doing its job – pricing in bad news. This may be too pessimistic and too short-term oriented, but investors who accept benefit from the ability to sell whenever they want. Investors who don’t can just hold on. It’s better than being in funds whose value depends on appraisers’ assessments of property values and where the manager decides when you can withdraw money.
Personally, I recognize that this bear market might be fairer than me – but after such a big drop, I’m starting to buy, while being aware that we might still have to go lower. As previously stated, I believe REITs with blue chip properties, reasonable leverage and long debt maturities will materialize and then begin to increase dividends in real terms as we recover from the pandemic.
So, I gave up on some European real estate, where I was no longer convinced it was true, buying a bit in Capco/Shaftesbury (which previously seemed too expensive to me) and I’m starting to look at the logistics again.