Dentons Asset Management & Investment Funds Group: Real estate funds outlook 2021 – cautious optimism but a long way to go | Dentons
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 predict what happened to real estate funds in 2020. Hopefully, now that a new administration prepares to take over in the US and mass vaccinations are going on, we are on our way back to a form of what should real estate funds expect from the normal in 2021?
Looking back at the beginning of 2020, we in Great Britain had just left the EU and the Conservative government had won a general election by a large margin. However, red flags were hoisted for real estate funds, with at least one large fund having suspended redemptions. During the first 2020 lockdown, more open-ended property funds announced they were “closing” as independent appraisers declared a state of “material valuation uncertainty,” meaning they could not accurately value the underlying property assets because they could not access websites. Funds, mostly those with more cash reserves, reopened in June, with more to follow in the third and fourth quarters. There are still a few funds to reopen with managers citing the uncertainty of Brexit and challenging conditions. In addition, in 2020 the FCA discussed the possibility of introducing notice periods of up to 180 days for open-ended real estate funds. A policy statement and final rules will be announced later this year.
Even if some funds closed to redemptions, it was estimated that £ 1.1 billion would be withdrawn from global open-ended property funds in 2021 (£ 2.3 billion in 2019). Fund withdrawals reportedly slowed towards the end of 2020.
For investors in real estate funds, the blocking required a change in approach. With travel restrictions in place, they had to get used to performing virtual due diligence very quickly. It is estimated that by the end of 2020, a sizeable majority of institutional investors will have returned to the market. At the start of the pandemic, it was not surprising that those LPs investing in funds did so with managers they already had relationships with. The market is expected to open again in 2021 for newer fund managers to raise capital as the wall of capital that has yet to be invested looks for a home. Fundraising levels have been declining since Q1 2020, and a decline in fundraising may have been another example of a position being accelerated by the effects of COVID-19 rather than being created by COVID-19. Certain parts of the real estate sector demonstrated their resilience in 2020. Logistics, housing and alternatives performed well, and fundraising for funds is expected to approach levels close to 2019 levels in 2021 with opportunities to invest in distressed assets.
The first few weeks of 2021 show how difficult it is to predict the market. Some high profile real estate deals have already been closed and the retail industry continues to face challenges. However, the announced closings of real estate funds and the multiple stores in the logistics sector are to be assessed positively. In addition, the London office sector was estimated to have transactions valued at approximately £ 5bn in the fourth quarter of 2020 and there were reports of a record year in 2020 for the multi-family sector with a transaction volume of approximately £ 3.5bn .
Anecdotes suggest that real estate professionals believe the sector will finish 2021 better than it did originally. Of course, a lot depends on external factors, and there is still a long way to go, but with funds launching new rounds of capital raising, investors looking to rebalance portfolios, and the strength of a wide range of sectors, there are many reasons why you should be positive about it the outlook for real estate funds in 2021.