Institutional engagement in open-ended real estate funds is tried and tested. These typically core and core-plus funds have long served as a way to make bets on top quality assets that offer fixed-income-like performance via products with the added benefit of liquidity options. They stand apart from their closed-ended cousins, especially when it comes to redemptions, often structured on a quarterly or yearly basis.
But some investors are placing more emphasis on another benefit. They want to be able to customize and control their exposures to specific property types. In response, some asset managers are launching more sector-specific, open-ended funds. These are one solution for investors unsatisfied with a lack of customization offered by diversified core funds, which constitute the majority of the open-end real estate fund universe, and limited liquidity offered by closed-ended vehicles.
By mixing and matching sector-specific, open-ended funds, investors can tailor their real estate portfolios. Those that have high conviction in the logistics sector could choose to be overweight in the sector and shrink their exposure to the office or retail sectors as they see fit, for example.
Latching on to this investor demand, this week, Greystar Real Estate Partners hired former Angelo Gordon managing director Terri Herubin for a new role to oversee the firm’s US open-ended funds platform. Herubin, who previously held positions at The Townsend Group consultancy (now part of Aon) and the US pension New York State Teachers’ Retirement Fund, told PERE that the launch of Greystar’s own sector-specific open-ended funds platform was driven by investors seeking more control.
Dino Christoforakis, head of transactions in North America at AFIAA Foundation for International Real Estate Investments, agreed that at this point in the cycle, investing in sector-specific open-ended funds would be a better way to control portfolio diversification. However, if an investor is total return focused, asset agnostic closed-ended value-add funds might be more attractive, he said. AFIAA is an international investment platform that offers direct and indirect real estate investments for Swiss pension funds because Swiss law mandates that pensions must make international real estate investments via a third party like AFIAA.
Greystar is not alone. Nuveen Real Estate launched a US multifamily-focused open-ended fund in late February, adding to its existing series of sector-specific, open-ended real estate funds focused on property types such as retail and logistics. Similarly, CBRE Global Investors launched an open-ended fund focused on UK affordable housing in January.
Beyond these recent anecdotes, the data suggest sector-specific, open-end funds are not yet the predominant core offering. In the US, the National Council of Real Estate Investment Fiduciaries, the real estate funds indices provider, currently tracks 41 open-ended funds. Of these, just five are sector-specific funds, though NCREIF says there were none in the index prior to 2003.
In Europe, meanwhile, 90 of the 350-odd core funds in the database of the European Association for Investors in Non-listed Real Estate Vehicles are single-sector, open-ended funds; none of the 12 funds included in its European ODCE Index launched earlier in the month are.
Whether that situation changes depends on if investors feel they can best control their exposures to specific asset classes through these vehicles over a meaningful period. If they can, that could have an impact on commitments to listed real estate businesses, many of which are sector specific. Though customization and liquidity have long been perks in the publicly traded market, private outlays will always boast being unaffected by general equities sentiment.
Of course, open-ended funds do not let investors trade in and out of positions as easily as products on the public market. But they do promise some degree of liquidity, certainly compared with closed-ended funds that typically require a seven to 10-year commitment and are otherwise only tradable on the private secondaries market. As long as investors do not rush to redeem all at once, this promise of moderate liquidity is a good compromise for gaining exposure to less volatile, more reliable returns.
Though core real estate loses attractiveness as returns are naturally lower at this point in the cycle, the nod by some private real estate folk toward sector-specific, open-ended funds is an indicator that, for some institutional investors at the moment, customization and control are qualities that rank just as high on their agenda.