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Investors in private real estate funds are finding out what liquidity risk means. High redemption requests are forcing big real estate funds to delay redemptions. Peter Grant and Esther Fung report for the Wall Street Journal:
Overall, more than 15 of the 25 open ended core funds tracked by the National Council of Real Estate Investment Fiduciaries have investors waiting to redeem tens of billions of dollars worth of investments, according to industry participants. The Council said it doesn’t tabulate redemptions.
Those 25 funds had a total of $267.1 billion gross real-estate assets at the end of September, according to the Council. Their redemption issues mean more headaches for cash-starved investors in these funds, including public pensions that, as of March 31, held $4.93 trillion less than the cost of promised future obligations, according to Federal Reserve data.
A Council index tracking the performance of core funds—including their income and changing property values—fell 1.56% in the second quarter of 2020 from the first quarter. It was the index’s first decline since 2009, when this group of funds began a yearslong rally after the financial crisis.
The average queue for a real-estate core fund is equal to 8% of the assets in the funds, which before the pandemic were redeemable upon request, industry participants say. The longest redemption queue is for the UBS Trumbull Property Fund, where it amounts to about 40% of the fund’s $18 billion of assets.
Chicago’s Metropolitan Water Reclamation District Retirement Fund is among the investors trying to withdraw from the UBS fund, asking for $32 million, according to an August report by Marquette Associates, a consultant to the pension
With the redemption queue at more than $8 billion, “we anticipate a significant lag, extending beyond 2021 before the redemption request is met,” the report said.
Brian Wrubel, chief executive of Marquette, pointed out in an email that many funds put in redemption requests when the market “sold off.” Now that markets have stabilized some funds are now “rethinking those requests,” he said.
J.P. Morgan Asset Management’s $40 billion Strategic Property Fund is meeting redemption requests partly by selling some of its more stable properties, such as office buildings with long-term leases to tenants with good credit, say people familiar with the firm.
The firm recently agreed to sell a fully leased Seattle office building to Amazon.com Inc. for more than $625 million, according to people familiar with the matter. J.P. Morgan also has agreed to sell the Crescent office complex in Dallas for more than $650 million, according to people familiar with the matter.
UBS Trumbull, meanwhile, has been dumping properties at highly discounted prices. The fund sold its roughly half stake in Water Tower Place, a mall in Chicago, to its partner Brookfield Asset Management for a nominal amount, according to people familiar with the matter.
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