You are using an outdated browser. Please upgrade your browser to improve your experience.
How would you like your page printed?
Traditionally, open-ended vehicles have been most frequently used for core and core-plus strategies. However, managers are increasingly utilising open-ended vehicles for strategies targeting a higher rate of return, including strategies with a larger value-add or opportunistic component and asset class-specific strategies, such as hotels funds, which have previously been served by closed-ended vehicles. This has resulted in a proliferation of funds in the market that are best described as being hybrid or semi-liquid open-ended vehicles, both in terms of their return and liquidity profiles.
Real estate fund managers are increasingly favouring these hybrid open-ended vehicles for the following reasons:
The most obvious challenge with any open-ended real estate fund is the inherent tension between offering liquidity options to investors where the underlying assets are fundamentally illiquid.
Managers deal with this by imposing redemption queueing procedures, redemption limits, and by providing for a relatively long timeframe on their obligation to meet redemption requests, in the fund documents. Investors accept the need for these restrictions in order to ensure exits can be managed in an orderly fashion without adversely affecting the remaining investors or triggering a fire sale. We have also seen managers explore the means of offering liquidity to investors through the use of more traditional REIT structures and lately through digital exchanges and the ‘tokenisation’ of fund interests.
Another related challenge for open-ended vehicles of this nature is that the desire to move higher up the return spectrum conflicts with the income- or yield- generating characteristics of the underlying assets. Open-ended vehicles have traditionally offered a regular income stream, which is attractive to investors. A desire to produce increased IRRs may well bring other challenges, including less consistent cash flows, which may be less attractive for investors.
Fund managers and investors will need to keep an open mind about the use of hybrid or semi-liquid open-ended vehicles for real estate strategies with a higher target return and whether these funds can survive continuing pressures on liquidity. Otherwise, investors may call time on the “open season”, following which we are likely to see a return to conventional closed-ended vehicles.
UK Real Estate Horizon Scanning 2020
Explore further topics across our UK Real Estate Horizon Scanning 2020 publication.