The market for open-end core real estate funds has gone through a transformation in recent years, and nowhere has that change been more evident than within UBS’s Trumbull Property Fund.
At $16.7 billion, TPF is one of the biggest funds in NCREIF’s US open-end diversified core equity index, as well as one of the longest running, dating back to 1978. During the past two years, however, the vehicle has seen a steady stream of redemption requests, leading to an exit queue that now stands at nearly $6 billion. The Swiss bank has resorted to offering 25 percent fee discounts to investors that agree to lock up their capital for four years in an attempt to stem the tide of outbound capital.
UBS is an unusual example of hardship in a sector that is in good standing overall but nonetheless in a state of flux. Overall, the 24 funds that comprise NCREIF’s ODCE index are continuing to grow, having totaled $260 billion of gross asset value at the last count. As investors exit TPF for new opportunities, their migration patterns reflect their changing perceptions of what constitutes core real estate.
Many investors have cited TPF’s overexposure to retail as the driving force behind their departures. Mall assets that were once staples of healthy core portfolios now struggle amid the rise of e-commerce and have become drags on performance for TPF, which has lagged the NCREIF benchmark over the past one-, three- and five-year periods. Non-ODCE fund managers are also struggling with their allocations to the sector. M&G Investments this week shut down withdrawals from its £2.5 billion core fund, M&G Property Portfolio, to allow itself more time to raise cash and sell assets to meet redemption requests. The London-based firm has blamed Brexit as well as the UK’s struggling retail sector for its poor performance and subsequent outflows.
Although sentiment has turned against specific funds, core real estate has not seen an exodus of capital, but rather a significant reshuffling as institutional capital seeks alternative strategies that better match its ideal core exposures. Some groups are gravitating toward sector-specific vehicles that allow them to customize. Others are opting to be more hands-on with their core portfolios through direct investments. Many are simply redeploying redeemed capital into other ODCE funds.
Two ODCE funds in particular have benefited most from this reshuffling of core capital. PERE understands that LaSalle’s US Property Fund and Morgan Stanley’s Prime Property Fund both have significant contribution queues. LPF, which had a gross asset value of $5.9 billion and a net asset value of $4.4 billion as of September 30, is approaching $1 billion raised this year, according to a source familiar with the fund. Much of this equity haul – 68 percent of which has come from new investors – has been driven by redemptions from other ODCE funds being allocated to LPF, thanks to the vehicle’s strong index performance. Both funds have more favorable portfolio allocations than TPF – namely, they are more heavily weighted to industrial assets and have less exposure to retail.
TPF’s ever-growing redemption queue makes it an outlier in the ODCE space. Indeed, 15 of the 24 ODCE funds have contribution queues, according to PERE research. And although ODCE funds may have lost some of their luster in the eyes of established domestic investors, they remain attractive to foreign institutions looking to increase their real estate exposure to the US.
Still, the large volume of outbound capital from TPF highlights a crucial fact about the sector today: investors have options for how they build their core portfolios and they are not afraid to use them.
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