Core Real Estate Funds Face $20B Of Withdrawals As Institutions Cut Exposure To Property

Across the globe, investors are looking to reduce their exposure to real estate in the coming years, with potential withdrawals in some core funds totaling $20B, according to Bloomberg.

A new survey found that 20% of North American investors are planning to decrease allocations to real estate over this year and next, while 37% of European investors aim to do the same, CoStar reported, citing the 2023 Investment Intentions Survey published Tuesday by a group of investments associations.

Almost a quarter of worldwide investors plan to decrease their allocations to real estate in the same period, and only 27% of investors globally are planning to increase allocations during that time, according to CoStar.

With commercial real estate values ​​on the downswing, firms like Blackstone and Starwood have limited redemption requests for their non-traded REITs. Institutional investors are looking to withdraw $20B from a group of property funds that relies on those investors for capital, Bloomberg reported.

These funds — known as open-ended diversified core equity, or ODCE, funds — are run by managers like JPMorgan Chase & Co., Morgan Stanley and Prudential Financial, which are facing a queue for withdrawals they haven’t seen since the recession in the late 2000s, according to Bloomberg.

The redemption requests come as values ​​for real estate shifted over the last year. The consistently rising cost of borrowing prompted commercial property prices to slide 13% in 2022, Bloomberg reported, citing research by Green Street. A Bloomberg tracker of publicly traded REITs found they had fallen 29% in the same period.

ODCE funds have a lag because they are valued based on comparable sales, which have been few and far between, so the index gained 7.5% for all of 2022, although it did fall 5% in the last quarter of the year.

Unlike some non-traded REITs, ODCE funds don’t limit withdrawals. Requests for redemptions have caused “many core funds to attempt to sell their most liquid assets, like industrial and multifamily assets, which implies a headwind for even the most relatively resilient sectors [of CRE],” PGIM Global Chief Operating Officer Cathy Marcus wrote in a December note.