Real estate market expects release of EUR10.4bn assets by 2023
The INREV Funds Termination Study 2021 reveals that 35 European closed end non-listed real estate funds are due to terminate between 2021 and 2023, releasing a potential EUR10.4 billion in Gross Asset Value (GAV) back into the market.
This is partly due to the significant increase in use of the option to extend the funds’ life, this is notably less than last year’s results when 50 funds with EUR17.9 of GAV were terminating in the three year interval between 2020 and 2022. By 2030, 85 funds are expected to have terminated, representing EUR31.3 billion GAV.
Most terminations are likely to take place in 2021 and 2022, with a total of 14 funds in each year. Out of those 28 funds, value add funds dominate, representing 47 per cent of the total value for this period, while 40 per cent are core and 13 per cent are opportunistic. This represents 11, 14 and three funds, respectively. Of the 35 funds due to terminate between 2021 and 2023, 11 were first closed between 2014 and 2016. However, as nine funds were launched before 2008, the average expected duration of the total sample is 11 years.
Funds with termination dates due between 2021 and 2023 delivered an average total return of 4.1 per cent over a 13-year period. This is in contrast to 2020, when the average performance of these funds entered negative territory for the first time since 2008, returning -4.0 per cent. The decline in performance last year can be explained by the weaker market conditions, alongside the disposal of remaining assets at late stages of liquidation potentially resulting in discounts – especially for weaker performing sectors such as retail.
The funds terminating in 2023 are the largest of those due to terminate over the coming three-year horizon, with an average GAV of EUR491 million compared to averages of EUR260 million and EUR235 million for those terminating in 2021 and 2022, respectively.
Most of the funds with a single country strategy terminating between 2021 and 2023 (17 of the total), are focused on the UK and Italy, with six each, and the potential to bring a combined GAV of around EUR1.45 billion and EUR1.09 billion million back into the respective markets.
As for single sector strategy funds of which there are 16 in total, five funds target retail, collectively accounting for EUR1.38 billion GAV. The sector with the second highest number expected to terminate are offices with four funds due to terminate over the next three years and a total GAV of EUR890 million.
Interestingly, when asked which termination strategies they considered or would consider for their fund, the most popular termination option for all managers was extension, with 50 per cent of respondents citing extension regardless of the investment style. While the increased desire to extend the funds could perhaps demonstrate either a positive or negative investor sentiment for allocations to the sector (such as industrial/logistics and retail, respectively), on the other hand, a roll-over to a new fund or vehicle structure was less considered than has been the case in recent years.
Of the liquidated funds or funds in liquidation, 60 per cent cited the main driver behind the termination as ‘no issue, termination was going ahead as planned’. The second most selected driver, at 40 per cent, was the ‘terms set for termination options in the fund documentation’, while the third was ‘current market conditions’ at 33 per cent.
Iryna Pylypchuk, INREV’s Director of Research and Market Information, says: ‘These results add further colour and clarity to the themes that we have been witnessing over the past two years. While there are no large surprises, with dispersion in sectoral performance and weaker market conditions likely playing a role, the popularity of fund extensions in this year results is perhaps also an indication of the ongoing appetite for investment in real estate as an asset class. Equally, it will be interesting to keep a close eye on what fund structures and sectors the liquidating fund’s capital will be redeployed into.”