INREV
Henri Vuong - INREV
Henri Vuong, INREV director of research and market information, said there would be a peak in upcoming terminations next year with 42 funds – representing almost €17bn – due to terminate.
The latest research into fund terminations from INREV shows a sharp rise in the number of funds heading for liquidation. The European non-listed funds association’s Fund Termination Study 2014 found that almost one in two participating funds (47%) due to terminate in the next two years is expecting to liquidate, compared to nearly one in three (32%) last year.
Liquidation has now overtaken extension as the preferred method of termination for European real estate funds ending in the next two years, according to research by the Amsterdam-based INREV, whose findings show that investors are “increasingly prepared to liquidate funds that fail to deliver the expected level of return”.
The INREV Fund Termination Study 2014, the ninth such annual study, analysed termination decisions for 145 closed-ended funds with a combined gross asset value of €59.1bn. The vehicles had original termination years between 2009 and 2015.
The survey, which also looked at a smaller sample of 64 funds due to terminate in the next two years, found an increase in the proportion of funds having already chosen liquidation or having planned to do so. Almost one in two participating funds (47%) expect to liquidate, compared to nearly one in three (32%) in INREV’s survey last year.
Henri Vuong, INREV director of research and market information, said there would be a peak in upcoming terminations next year with 42 funds – representing almost €17bn – due to terminate. “This may help ease the burden on investors looking for quality assets at a time when demand is increasing due to higher levels of capital raising,” he said.
The proportion of funds looking to extend has fallen to 34% from 54% last year. Half of the assets owned by funds, in extension or due to extend, are in Western Europe, with 28% in the UK. Spain and Portugal account for 21% of assets, showing a confidence in the countries’ respective recovery. Last year, southern Europe represented 52% of the assets being liquidated. The region represented less than 30% this year.
INREV said investors also appear keen to hold on to student housing and leisure assets – which together account for 4% of assets in liquidating funds, a significant drop compared to last year (11%).
Fund performance and market conditions continued to be the key deciding factors, INREV said. On a 13-year, annualised performance basis, funds that opted to extend achieved aggregated total returns of 5.11% a year. “This is in stark contrast to liquidated (or liquidating) funds,” INREV said, pointing to total returns of just 0.57% on a 10-year, annualised performance basis. “On a five-year return basis, the differences in returns are more extreme.”
Funds that opted to liquidate achieved total returns of -9.62%, while those that opted to extend delivered positive returns of 0.39%.
The 2014 study suggests that greater macroeconomic stability may also be having an impact on termination strategies. In the 2011 and 2012 studies, 10% and 6% of funds, respectively, had reached a decision two years prior to termination. These numbers have risen to 26% in 2013 and 19% in 2014, with a “less turbulent climate helping more investors make earlier decisions”.
Another potential sign is the drop in the proportion of funds citing liquidity as a key consideration (21% in the 2014 study, down from 33% last year).
