January is traditionally the time when experts look into their crystal ball and predict the outcome for the next 12 months. It would have taken some effort to correctly forecast what happened to real estate funds during 2020. Now, as a new administration prepares to take over in the US and, with mass vaccinations being implemented, we are hopefully on the path to returning to some form of normality, what lies in store for real estate funds in 2021?
Looking back to the start of 2020, in the UK, we had just left the EU and the Conservative government had won a general election by a wide margin. However, red flags were being raised over real estate funds, with at least one major fund having suspended redemptions. During the first lockdown of 2020, more open-ended real estate funds announced that they were “closing” as independent valuers declared a state of “material valuation uncertainty” i.e. they could not accurately value the underlying property assets, due to not being able to access sites. Funds, mainly those with more cash reserves, started to reopen in June, with more following in Q3 and Q4. There are still some funds yet to re-open, with managers citing Brexit uncertainty and challenging conditions. In addition, during 2020, the FCA consulted on the possibility of introducing notice periods of up to 180 days on open-ended property funds. A policy statement and final rules will be announced later this year.
Even with some funds closed for redemptions, it has been estimated that £1.1 billion was withdrawn from global open-ended real estate funds in 2021 (£2.3 billion in 2019). Reports suggested though that fund withdrawals were slowing down towards the end of 2020.
For investors in real estate funds, lockdown necessitated a change of approach. With travel restrictions in place, they very quickly had to get used to undertaking due diligence virtually. By the end of 2020, it is estimated that a sizeable majority of institutional investors had returned to the market. At the start of the pandemic, not surprisingly, those LPs who were investing in funds were doing so with managers with whom they had existing relationships. The expectation is that, during 2021, the market will open up again for newer fund managers to start to raise capital, as the wall of capital yet to be invested looks for a home. Levels of fundraising have been on a downward trajectory since Q1 2020 and a fall in fundraising was possibly another instance of a position being accelerated by the impact of COVID-19 rather than being created by it. Certain parts of the real estate sector demonstrated their resilience in 2020, with logistics, residential and alternatives performing well and it is anticipated, with opportunities to invest in distressed assets, that in 2021 capital raising for funds will rebound to something near the levels seen in 2019.
The first few weeks of 2021 demonstrate the difficulty in predicting the market. Already some high profile real estate deals have been pulled and the retail sector continues to face challenges. However, there are positives to be taken from announced real estate fund closings and multiple deal activity in the logistics sector. In addition, it is estimated the London office sector in Q4 2020 had approximately £5 billion of transactions and there have been reports of a record-breaking year in 2020 for the multi-family sector with transaction volumes at circa £3.5 billion.
Anecdotal evidence suggests that real estate professionals feel that the sector will finish 2021 in better shape than it started. Obviously, a lot depends on external factors, and there is a long way to go, but with funds embarking on fresh rounds of capital raising, investors looking to rebalance portfolios and the strength of a broad range of sectors, there are plenty of reasons to be positive about the outlook for real estate funds in 2021.