Open-ended real estate funds experience another month of exits


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Open-ended real estate funds recorded net outflows of £ 81million in April, the 31st consecutive month of outflows, according to data from Calastone.

Just over £ 5bn have left the industry in the past three years, which equates to £ 1 in every £ 8 under management.

However, April’s outflows were the weakest since September 2020, due to a reduction in selling activity rather than an increase in buying.

Edward Glyn, Head of Global Markets at Calastone, said: “Investors are looking to the post-pandemic boom that looks increasingly likely to take off in sync in the developed world.

“But it’s too early to call an improving trend for real estate funds, as the post-pandemic form of the industry is still taking shape. The record sale of real estate funds in March may simply have been a blow to sellers wanting to crystallize their capital losses before the end of the tax year.

The news comes as the Financial Conduct Authority has delayed the conclusion of its review of open-ended real estate funds that have been the source of industry discontent for years.

The watchdog is consulting on a number of changes to the structure of open-ended real estate funds, including a potentially long notice period for redemptions, with the aim of protecting investors from losing control over their investments.

Mike Barrett, consultant director at Lang Cat, said there was real potential for the property to become a “niche” asset class as a result of the proposed changes.

“The majority of clients will always end up investing in a model portfolio, [in] which operationally, I don’t think there is a way to introduce notice periods.

“So if you want or need to invest in real estate, you [would have to] getting into a more bespoke service with the unintended consequences that there will be fewer people investing in real estate as an asset class, and those who do will likely have to pay more to do so.

The aim of the consultation is to resolve the fundamental mismatch of the illiquid nature of the real estate held by the funds that allow investors to trade on a daily basis.

This lag has led the majority of open-ended real estate funds to block withdrawals at various times over the past 10 years due to waves of redemptions amid economic uncertainty – for example due to Brexit or uncertainty surrounding the Covid-19 pandemic.

The longest period of suspension was last year, as real estate appraisers adopted ‘valuation uncertainty’ clauses on funds because they were unable to adequately assess properties held by the funds due to the pandemic.

However, the FCA has said it will delay the decision while it receives comments on a new structure it is proposing to address the problem – the long-term asset fund.

sally.hickey@ft.com

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