In January, Bill Hughes, a former head of RREEF's real estate business in the UK, accepted a part-time role as chairman of the Association of Real Estate Funds (AREF).
There are multiple missions, but one of his goals during his term will be to keep an eye on open-ended fund structures.
Open-ended pooled vehicles in the UK have attracted controversy of late for the way in which investors have been able to redeem their shares en masse, and in some cases destabilise the fund so much that fire sales have been required to meet redemption requests.
“I don't think property should consider itself an isolated case in terms of having problems,” Hughes said. “But I do want to make sure that we have structures that can withstand future market corrections that also work well in an upwards market.”
Generally speaking, Hughes says funds that have best withstood the market correction have been those that turned assets into cash by the end of the first half of 2007. He stressed it was up to fund managers to be “ahead of the curve” by taking portfolio decisions promptly.
“But the other thing we need to consider is how open-ended funds have constraints and sensible restrictions around cash inflow and cash outflow in both an upwards and a downwards market,” he said. “This is where I think, generally speaking, US funds have positioned themselves more favourably.”
Issues such as “gates” (restrictions on the amount of money that can flow out of a fund over a period of time) are something to be looked at more closely. While Hughes said some UK fund managers had taken such actions, investors' understanding of such concepts was not as good as it could have been. “That is about knowledge and education,” he said.
Indeed, one of the challenges AREF faces is the increasingly global nature of investors and investing. He thinks information sharing, while not leading to a homogenous fund structure, could be beneficial for best practice. This is where the ability of open-ended funds to combat serious withdrawals of money comes into the picture.
The US' experience, where funds have “sensibly visible constraints on liquidity”, suggests that UK and European funds could do more. According to Hughes, whose day job is managing director of Legal & General Property, closed-ended funds have appeared to be a more resilient model.
However, there are issues to be examined with this structure too. He said the way loan coverage and loan-to-values have spiralled out of control is about “insufficient consideration” being given to gearing.
“There are lots of other issues such as whether fund managers should be rewarded by managing gross asset value or net asset value, and who should be in control of debt decision making in funds and to what extent that should include investors.”
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