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INREV Fund Termination Study 2018

A very brief blog

This is slightly counter-intuitive as conversion from a closed-ended to an open-ended fund or listing the vehicle would seem particularly relevant for funds with core portfolios.

 

The United Kingdom continues to see successful REIT IPOs, so this would seem an obvious option to consider. This is a topic that will be debated further at the annual ULI UK REIT seminar on 27th September (details here).

 

The UK has also seen the development of more semi-open ended funds with periodic liquidity events. One of the earliest in the UK was the conversion of the Airport Industrial Property Unit Trust (AIPUT) from a closed ended fund to a semi open ended fund in early 2015, extending its life by 21 years. You can read a brief press item about it here.

 

Another slightly surprising conclusion of the 2018 Fund Termination Study is that "Funds that are in liquidation have historically performed better than funds in extension." This is the reverse of the conlcusion on the same point in the 2017 Fund Termination Study.

 

Our view is that even if the ultimate decision is to liquidate the fund, all the options should be considered and there should be an open and early dialogue with investors.

The 2018 INREV Fund Termination Study was published on 21st August. You can read the snapshot of the report here.

 

We have no involvement in the report, but could not resist the urge to comment.

 

The study has been produced annually since 2007.  This year it is predicted that there will be a spike in number of funds terminating in 2020, with 22 funds scheduled to come to an end.  Fund managers with funds coming to an end in 2020, need to be taking action now.  Active engagement with investors is key.

 

John was part of the INREV / IPF / AREF "End of Life Project" which aimed to provide advice on best practice relating to the end of life period for closed-ended real estate funds.  The report, which was published two years ago, in September 2016, can be found here.

 

The End of Life report sets out the expectations of investors and managers, as well as establishing four overriding, guiding principles:

 

1.  Communication: transparency and timeliness;

 

2.  Fund documentation: explicit yet flexible;

 

3.  Conflicts of interest: recognise and manage; and

 

4.  Management decisions: be mindful of termination date.

 

One of the more surprising elements of the 2018 fund termination study is the apparent lack of interest in options other than liquidating or extending the fund. According to the study, only opportunity funds considered other options.