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“Unlisted funds – lessons from the crisis” three years on
January 2015
Limiting liquidity
One of the most dramatic impacts of the crisis on real estate was the redemption crisis faced by the open ended funds. In the aftermath, investors had many questions regarding the behaviour of managers:
i) How well prepared for the downturn and liquidity crisis was the manager?
- How effectively had the manager controlled inflows in the run up to the crisis?
- Had they anticipated an increase in redemptions and built up cash reserves within the fund to put it in a stronger position to cope with outflows?
Lessons from the crisis - what has been learnt?
The report that I wrote for the Association of Real Estate Funds (AREF), "Unlisted funds - lessons from the crisis" was commissioned in 2011 and published three years ago in January 2012. AREF and the Investment Property Forum (IPF) held an update seminar and panel discussion in May last year, details of which can be found here.
What were the key messages of the report, and what has changed?
The original report noted that real estate is not a fungible asset. It is fundamentally illiquid and it is not straightforward to reduce a holding in a particular asset. Owning shares in listed real estate companies does create a fungible asset that allows an investor to increase or reduce their holdings as appropriate. The extent to which real estate funds approach this depends upon the characteristics of the fund. There is a trade-off between liquidity, volatility, performance and risk. There is an increasing recognition of the consequences of this, and many managers of open-ended funds have, with the support of investors, moved to place restrictions on absolute liquidity, by limiting the capacity for investors to redeem their units. This is starting to become a spur to product development, which is discussed further below, but also raises important governance issues and the need for clear communication. There is an increasing recognition amongst investors that there is no "right" or "wrong" answer to the trade-off between liquidity, volatility, performance and risk. Different investors will have different views, and those may change over time. Where there is any element of redemption, there is always a need to strike a balance between the interests of investors wishing to leave and those wishing to stay.