Lack of liquidity has been a long-standing reason
for not investing in real estate. The assets are
large and take months to sell, while real estate
equity performance tends to track the equity market, not the real estate market. However, the development of more and more unlisted real estate funds means investors are moving closer to being able to trade units in vehicles which give real estate returns.
However, no-one in the industry is under any illusions
about how quickly this is going to develop. Even the
most liquid unlisted real estate funds have only a fraction
of the liquidity of the least liquid listed companies.
However, the funds industry and bodies, such as
INREV, are moving slowly towards the development
of a secondary market. The situation is somewhat different
for open-ended and closed-ended funds.
In open-ended funds, such as the large German special
funds, liquidity comes from the fund manager
matching investors wishing to get out with investors
wishing to get in (rather than redeem the investment
of the former and add new investment from the latter).
And balanced UK open-ended funds see around
10% of the equity traded each year.
In closed-ended funds, the situation is different.
Historically, managers have not been interested in
promoting liquidity as they are being paid to manager
the capital in the fund and could argue there is no benefit
from encouraging their capital providers to sell in
and out. Mike Clarke of Schroders, who also chairs
INREV’s committee on liquidity, says increasing liquidity
in closed-ended unlisted funds will encourage
smaller institutional investors, especially those
investing in real estate - or perhaps just overseas real
estate - to enter the market, making it more dynamic.
“Larger investors tend not to be so worried about
liquidity as the investment in a single fund will be a
tiny proportion of their total exposure. Smaller
investors, especially if they are investing in this sort
of vehicle for the first time, will want liquidity as
safety net. Nonetheless, more liquidity benefits
everyone – the lack of it has been one of the major
barriers to investment in real estate.”
So far, unit trusts have been the most liquid
closed-ended real estate vehicles, but Clarke says:
“There is no practical difficulty to liquidity. Any
closed-ended structure, whether it’s a Channel
Islands unit trust, a limited partnership or a Luxembourg
FCP, can offer liquidity. “The key to liquidity
is transparency. That’s what the industry needs to
develop in order to move on. There’s no discount
for liquidity, only for lack of information.”
One problem is that many of the closed-ended
unlisted vehicles are working on an opportunistic
model, where assets are carried at cost and returns
calculated when they are sold This applies to a lesser
to degree to value-added funds.
Another is the base information that is available to
investors. “There is more confidence in the valuation
system in the UK, which makes it easier for a secondary
market to develop,” says Clarke.
“There is a deeper investment market, which gives
more information for valuers and ensures more accurate
valuations. So investors trading around NAVcan have
confidence in that value.” There are also concerns from
both investors and managers that too much manager
attention towards providing liquidity - managers trying
to be market makers for example - could affect returns.
Clarke admits that development of secondary trading in unlisted vehicles will take time. INREV is
working on best practice guidelines for investors and managers which is set to be announced at INREV’s conference in April. INREV hopes that the more market players who take the best practice guidelines on board, the further the market will move towards liquidity.
Hercules show strength
UK retail park fund Hercules Unit Trust,
which is managed by Schroders and Pillar
Property, is probably the most liquid closedended
property vehicle in Europe. Over £121m
(€174.6m) of trades were conducted in the
£2.3bn trust in the year to November.
At the end of September the fund had 100
investors, including 39 corporate pension
funds (representing 23.6% of the unit holder
base), 23 local authority pension funds, six
charities, five common investment funds, five
pooled property funds, 14 professional
investors and eight others (including property
Some in the property industry have argued
that Hercules’ liquidity has just been a sideeffect
of the interest in and performance of UK
retail parks. However, Clarke says: “There is
no reason why other large funds should not be
as liquid as Hercules.”