EXPO REAL: fund extensions in vogue

Investors support continuation of fundsin the non-listed real estate market despite their own liquidity issues, says INREV.

Fund managers and investors are opting for fund extensions when evaluating fund terminations according to the latest INREV study.

Launched at Expo Real, the fund termination study underlines last year’s findings that continuation is now the most likely outcome when evaluating a fund’s future.

Nearly two thirds of funds due to terminate between now and 2011 have decided to continue.

Of those, 88 percent have decided to extend the life period while 12 percent are rolling them over.

This equates to €15.8 billion in gross asset value, said INREV.

Fund managers and investors currently prefer to continue in order to recoup their capital as the market recovers. Some investors are forced to stay invested in funds they would prefer to exit due to difficulties in liquidating at prices acceptable to other investors.

Lisette van Doorn, INREV’s chief executive, said: “Continuation is again the most frequently used termination option, similar to last year. It is absolutely clear that fund managers and their investors are working very closely to achieve the best outcomes for each fund taking into account the very few real alternatives available in the current difficult market.”

She added that while in the last few years, the termination decision was heavily influenced by the scarcity of re-investment alternatives, this was less of an issue now. “Trust in the fund manager as well as issues at investor level, such as the need for liquidity, play a much more prominent role in the decision making process of investors,” she said.

Where funds had decided to continue, a relatively short extension of between one and three years is favoured. Extension is preferred over rollover as investors have to treat the latter as a separate investment decision based on its own new business plan from the fund manager.

A number of the investors interviewed explained that these short extension periods reflect uncertainty about the timing of an economic upturn and the time it takes to sell assets. It was also noted that such periods might well need to be extended again given the current high cost of refinancing.

INREV added that the level of continuation would probably be higher still if it were not for the fact that investors have their own liquidity issues and that fund refinancing can be difficult due to the issues in real estate funding by banks. 53 percent of fund managers stated that the debt issues within their funds was important when considering fund termination and 41 percent  felt similarly strongly about the availability of refinancing.