A number of property funds have recently acted to modify or restrict redemptions in response to sharply rising interest rates that have created heightened uncertainty and impacted net capital flows into all asset classes, including real estate. The redemption status for several direct property funds currently rated by Lonsec are outlined below. Importantly, the actions undertaken by the funds in respect of modifying redemption terms are permissible and outlined in the respective Constitutions and PDSs.
How did we get here?
- The risk-free rate (10 yr government bond rate) n the U.S. has moved from 1.6% at start of 2022 to close to 5.0% recently (Australia from 1.9% to 4.75%). The sharp increase in yields over a relatively short space of time has precipitated a repricing of all asset classes, particularly long duration assets.
- Exchange-listed assets, as shown by the S&P/ASX 200 A-REIT Index, responded far more quickly than unlisted assets and historically have tended to overshoot before retracing. Australian REITs are currently trading at steep discounts to NAV of up to 30%, particularly office REITs.
- Unlisted assets, as shown by the Lonsec-Select Australian Direct Property Fund Index, typically adjust with a lag, often causing asset allocation imbalances in diversified portfolios. History suggests the listed and unlisted markets will again converge, though the timeframe is uncertain.
- Worth noting that a similar theme is playing out elsewhere in the world. In late 2022, one of the most high-profile REITs, Blackstone’s USD70bn REIT (unlisted), limited redemption requests. The Blackstone REIT focused on rental housing and logistics in the sun belt states and had grown very quickly on the back of ultra-low interest rates. Redemption requests had eased by Q3 and Q4 2023.
While direct property funds have different liquidity terms, broadly speaking the managers endeavour to satisfy redemption requests (in order of priority):
Fund inflows – inflows have slowed to a minimum for most funds, reflecting uncertainty and repricing of asset classes.
Reducing distributions – some funds have done this, but most are reluctant, particularly while occupancy and fund cashflows remain strong.
Selling assets – arguably the best option but challenging conditions mean long lead times. There are also currently minimal real estate transactions taking place as buyers and sellers adjust expectations, slowing the price discovery process.
Debt facilities – satisfying redemptions by drawing down on debt facilities is not considered good practice particularly with asset values falling (double-whammy for loan-to-value ratios).
In circumstances where fund redemptions exceed a fund’s ability to meet its liquidity terms, Responsible Entities / Trustees have a fiduciary obligation to treat all unitholders equally. Temporarily modifying redemption terms is a prudent decision for these Funds and a means to balance the different priorities of all investors.
Where to from here?
It is likely conditions will only ‘normalise’ when interest rates peak, and all asset classes have had a chance to reprice. At this point, liquidity will remain dependent on the volume of investors seeking to withdraw versus those happy to remain invested.
Property funds by their very nature offer limited liquidity. The funds outlined below are well managed, with relatively conservative debt levels providing headroom to LVR and ICR covenants. Lonsec remains in close contact with all managers and our next review of the of the sector will be in Q1 2024.
|Direct Property Funds – Redemption Status
|Next Liquidity Window*
|Cromwell Diversified Property Fund
|Ceasing redemptions for 6 months from Oct 2023. Scaling of redemption requests via limited monthly withdrawal facility no longer meaningful. Distributions reduced to 5.75 cpu ~5.17%.
|Centuria Healthcare Property Fund
|Redemptions exceeding threshold of 2.5% per quarter. Redeemers pro-rated and in queue.
|Centuria Diversified Property Fund
|Redemptions exceeding thresholds of 2.5% per quarter. Redeemers pro-rated and in queue.
|Charter Hall Direct PFA Fund
|Most recent major Fund liquidity event closed in October 2022; 35% of redemption payments have been completed to date with the Manager targeting the balance for 1H 2024.
|Charter Hall Direct Office Fund
|Recent limited withdrawal offer oversubscribed and investor redemptions were scaled back.
|Chater Hall Direct Long WALE Fund
|Most recent major Fund liquidity event closed in May 2023. Redemption requests will be satisfied in full this calendar year, with the payment targeted to occur in November 2023.
|Charter Hall Direct Industrial Fund 4
|Recent limited withdrawal offer oversubscribed and investor redemptions were scaled back.
|Dexus Core Property Fund
|Hybrid fund – listed (REITs) & unlisted, currently at extremes of 30% – 70% range. Monthly redemptions restricted to 0.5% of the Fund’s assets from October 2023.
|Dexus Wholesale Australian Property Fund
|Payment of withdrawal requests extended firstly from 30 days to 6 months in May 2023 and then to 12 months in October.
|Invesco Global Property Fund
|Fund targets 70% global direct property / 30% GREITs. Gated Aug 2023 after redemptions exceeded 15% of the Fund’s assets over a rolling 90-day period.
|Partners Group Global Real Estate Fund
|Redemptions exceeded 5% quarterly redemption gate in Aug 2023. Redemption requests not accepted do not carry forward, quarterly gates reset in October. The 4% sell spread remains in place, redeemers paid that fee which goes to the benefit of the fund.
*Cromwell, Centuria and Charter Hall funds have 5-year full liquidity events. The liquidity strategy may include selling properties; raising new equity; arranging new debt financing; listing on the Australian Securities Exchange (ASX); winding up the Fund; or a combination of these. That said, liquidity events may be deferred in exceptional circumstances for so long as it is impracticable to offer liquidity, or it would not be in the best interests of the remaining investors for liquidity to be offered.
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