35 European closed-end, non-listed real estate funds are due to terminate between 2021 and 2023, releasing a potential €10.4 bn in Gross Asset Value (GAV) back into the market, according to the Inrev Funds Termination Study 2021 released on Wednesday.
This is partly due to the significant increase in use of the option to extend the funds’ life, this is notably less than last year’s results when 50 funds with €17.9 bn of GAV were terminating in the three year interval between 2020 and 2022.
By 2030, 85 funds are expected to have terminated, representing €31.3 bn GAV.
Most terminations are likely to take place in 2021 and 2022, with a total of 14 funds in each year. Out of those 28 funds, value add funds dominate, representing 47% of the total value for this period, while 40% are core and 13% are opportunistic. This represents 11, 14 and three funds, respectively. Of the 35 funds due to terminate between 2021 and 2023, 11 were first closed between 2014 and 2016.
However, as nine funds were launched before 2008, the average expected duration of the total sample is 11 years. Funds with termination dates due between 2021 and 2023 delivered an average total return of 4.1% over a 13-year period.This is in contrast to 2020, when the average performance of these funds entered negative territory for the first time since 2008, returning -4.0%.
According to Inrev, the decline in performance last year can be explained by the weaker market conditions, alongside the disposal of remaining assets at late stages of liquidation potentially resulting in discounts – especially for weaker performing sectors such as retail. The funds terminating in 2023 are the largest of those due to terminate over the coming three-year horizon, with an average GAV of €491 mln compared to averages of €260 mln and €235 mln for those terminating in 2021 and 2022, respectively.
Most of the funds with a single-country strategy terminating between 2021 and 2023 (17 of the total), are focused on the UK and Italy, with six each, and the potential to bring a combined GAV of around €1.45 bn and €1.09 bn back into the respective markets.
As for single sector strategy funds of which there are 16 in total, five funds target retail, collectively accounting for €1.38 bn GAV. The sector with the second highest number expected to terminate are offices with four funds due to terminate over the next three years and a total GAV of €890 mln. Interestingly, when asked which termination strategies they considered or would consider for their fund, the most popular termination option for all managers was extension, with 50% of respondents citing extension regardless of the investment style.
While the increased desire to extend the funds could perhaps demonstrate either a positive or negative investor sentiment for allocations to the sector (such as industrial/logistics and retail, respectively), on the other hand, a roll-over to a new fund or vehicle structure was less considered than has been the case in recent years.
Of the liquidated funds or funds in liquidation, 60% cited the main driver behind the termination as ‘no issue, termination was going ahead as planned’. The second most selected driver, at 40%, was the ‘terms set for termination options in the fund documentation’, while the third was ‘current market conditions’ at 33%.