Today’s big redemption queues are not a repeat of the past

As the private real estate industry stares down a recession, mounting redemption requests should come as a surprise to no one. Investors seeking to sell off full or partial stakes in open-end core funds is par for the course during a real estate down cycle.

However, it is significant that exit queues for funds in NCREIF’s Open End Diversified Core Equity index totaled $20 billion at year-end 2022, the largest amount since the global financial crisis, according to data from IDR Investment Management.

In a conversation with PERE this week, IDR executives were quick to point out that redemptions still represent only 7 percent as a percentage of the index’s net asset value, which is less than half of the 15 percent redemption rate during the GFC. Even so, that exit requests are at a 15-year high indicates that industry practitioners are expecting a steep drop in private real estate values.

There are notable differences between the redemption activity for ODCE funds during the GFC and today’s market dislocation, however. Unlike in the prior crisis, the majority of investors waiting in line to exit are not panicked by the market, but rather see redemptions as a means of rebalancing their investment portfolios, IDR chief investment officer Garrett Zdolshek told PERE.

The denominator effect is one driver of this rebalancing activity. In PERE’s upcoming Investor Perspectives 2023 survey, respondents said they were 21 percent overallocated to the asset class, more than double the 9 percent that reported being overallocated in 2022, and the highest such percentage in five years.

In that same survey, however, most investors said they would take no action with regards to this imbalance: 44 percent of respondents would choose to remain overallocated, while an additional 25 percent would wait for a market correction.

Arguably, then, a bigger driver behind the open-end redemption requests is the significant uncertainty created by continued high inflation and rising interest rates, geopolitical concerns, changing regulatory requirements – and the fact that private market values largely have not adjusted to reflect market conditions.

As Ben Sanderson, managing director of real estate at Aviva Investors, the global asset management business of UK insurer Aviva, noted in PERE’s recent cover story, many property owners failed to write down asset values early enough during the GFC. Now, managers will be more likely to want to sell off assets sooner than later, because it is better to take a smaller discount off current valuations today than a larger discount off a heavily reduced value later, he said.

For Taylor Mammen, chief executive at real estate consulting firm RCLCO Fund Advisors, anticipated repricing is the primary reason why open-end fund redemption queues have grown over the past couple of quarters. He estimated that investors putting in their redemption requests today will need to wait 12-18 months before they can withdraw any money from the funds.

Against that timeframe, getting ahead of repricing will be a tough challenge. During a valuations webinar hosted by NCREIF in December, participants were polled on the change in value they anticipated for Q4 2022. More than half expected to see a decline between 3 and 6 percent in the ODCE index for the industrial and residential sectors. For office, most respondents expected that decline to fall somewhere between 3 and 9 percent.

For many investors, redemption requests will not necessarily mean an actual commitment to withdraw capital. Indeed, Zdolshek believed property valuations and liquidity will likely become clearer over the next couple of quarters, which could then lead some investors to rescind their requests. “We believe pricing certainty will work out the queue,” he said.

So, while there may be a $20 billion exit queue for ODCE funds at present, the actual amount of redemptions could end up being far smaller. The quicker the repricing event happens, the shorter that queue will become. While redemption queues invariably emerge during times of crisis, we are in a crisis of uncertainty unlike any other.