As commercial property markets enter a period of uncertainty, investors in Irish property funds are being told they can’t get their money out. Investors in a number of funds managed by New Ireland, Zurich Life and Irish Life have been told in recent weeks and months that if they want their money out they will have to wait.
The last time this happened was in early 2020 when an increase in requests for redemptions led to property funds halting outflows, an issue exacerbated by the Covid-19 pandemic, before being resolved.
This time it appears that rising interest rates across the UK and Europe, which are pushing up funding costs, as well as uncertainty around the outlook for commercial property in a world of remote working, are making investors think twice. Fearing writedowns in the valuation of such funds, investors have looked to get their money back. Funds have since put a stay on such withdrawals, however.
When this happens, it means those seeking to take their money are then placed in a queue. The price they eventually receive for their holdings will be priced at the end of the period and not at the date they gave the instruction to disinvest.
Challenges in the commercial property market emerged late last year as interest rates started to rise across Europe and the UK. Against a background of higher interest rates as well as inflation and economic uncertainty, investors in UK property funds moved to withdraw their money. The surge in those seeking redemptions led to a freeze on withdrawals by many of the largest money managers, however.
In January US fund manager Blackrock deferred redemptions on its €4.1 billion (£3.5 billion) BlackRock UK Property Fund, while M&G said it would also defer redemptions on its £4.6 billion Secured Property Income Fund, citing the need to rebuild liquidity by selling property investments in an orderly way.
If you invest in this fund, there may be extended periods when you do not have any access to your money— Zurich Life
Blackstone Property Partners, which offers property investments for institutional investors, said in late January that it was facing redemption requests equal to 7 per cent of its €69.2 billion ($73 billion) net asset value – or about $5 billion. Subsequently, the Swiss-owned Credit Suisse Real Estate Fund International said in February that investors with a 13.3 per cent share in the fund have asked for their money back.
The Irish situation
It comes as no surprise that many Irish-managed funds are following suit.
In November New Ireland said it wouldn’t accept investments in, or withdrawals out, of PBIS European Real Estate Fund “until further notice”. The pan-European fund invests mainly in northern European “winning” cities and its main holdings include Atlantic House in London, the Duomo retail offering in Milan and the Südkreuz residential development in Berlin.
In a note at the end of January Bank of Ireland Investment Markets said the fund was starting to see “the impact of repricing in real estate markets driven by the impact of higher interest rates”. The fund is down by 6 per cent from the start of the year to March 3rd.
On February 20thZurich Life moved to restrict redemptions on its Zurich Life Property Fund, meaning that investors can’t withdraw their money from the fund until the suspension is lifted. New investments into the €33 million fund are also not allowed, a spokesman said. It’s not clear how long this will last as there is “no specific time limit on this suspension” he said.
As with the UK experience, Zurich took the decision due to increased outflows from the fund.
The Zurich fund invests primarily in a commercial property trust, which invests in offices, retail, industrial and mixed-use assets in Ireland, Britain and Europe though investment in any part of the world is permitted. Some of its key holdings are 40 Molesworth Street, Dublin 2, where tenants include law firm DLA Piper; Temple House in Blackrock, which is let to companies including Irish Life, and which was put on the market for about €10 million last year; 67/68 Grafton Street, which is let to Hugo Boss; as well as a number of large industrial units.
The fund is down by 8.6 per cent in the year to March 2023 and by 9.7 per cent over the previous three years.
Most recently, Irish Life has introduced a six-month notice period for withdrawal requests from one of its funds, the €500 millon Irish Property Fund, whose holdings include the Pavilions Shopping Centre in Swords, as well as 70 St Stephens Green, a newly built office building and 1 Harbourmaster Place, KPMG’s headquarters in the IFSC. Its other fund, the €1.7 billion Exempt Property Fund, is not impacted.
Effective from March 3rd, a spokesman says the decision was taken “due to the recent increase in the level of customer withdrawals from this fund”.
Introducing a notice period means that the fund will have time to make “any property sales as required to pay future withdrawals”.
The asset manager says that, long term, the outlook for its property funds is “favourable and unchanged”. “We continue to see property as an important part of people’s pension and investment portfolios,” the fund manager said.
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Not all Irish property funds have been impacted. Aviva, which merged its two property funds into the Aviva Irish Commercial Property Fund last year, says it has not closed the fund to withdrawals.
The fund is one of the largest property funds in the Irish market with about 62 properties across the retail, office, industrial and alternative sectors and a total fund value of €585 million.
A spokeswoman says the cash balance within the fund remains strong – standing at 16 per cent on March 3rd, 2023. This means the impact of redemption requests is not as significant.
The fund is, however, priced on a disposal basis and has been since January 2020. When a fund is based on an acquisition basis, it is typically growing and acquiring assets; when on a disposal basis, it is often due to cash exiting the fund.
Property fund suspensions
It’s not unusual for property funds to stop access to withdrawals. They typically carry warnings, like that of Zurich Life: “If you invest in this fund, there may be extended periods when you do not have any access to your money.”
“This means you could be waiting for a significant period of time before you are able to encash your investment,” Zurich Life says.
This is due to the high cost and time involved in buying properties; if too many people want their money back at once, funds may have to liquidate assets, which can take time. This is why many such funds are classified as “high risk” and due care should be taken before investing, particularly if liquidity is a priority.
As Irish Life says: “The deferral of withdrawals or switches is a feature of property funds.”
Investors who are retired and have an approved retirement fund (ARF), should certainly think twice about having money invested in a property fund. This is because there will be periods of time when you can’t access your money, which may be problematic if you’re relying on it for income.
Moreover, ARF tax rules mean that even if you can’t draw down income from your fund, you will still be taxed on it, as if you had drawn it down.