How to cope with a redemption freeze as office property prices fall
One of the issues that is hitting more investors at the moment is a liquidity freeze.
Quite a few unlisted property fund managers have once again responded to difficulties of valuation and cash flow within the sector to pull the hand brake on redemptions.
With some property valuations falling – particularly for offices – it can be a situation that locks investors into a nasty conundrum – forced to stick with an investment that will possibly keep falling in value and if you really need some liquidity, to look for the cash by selling down something else.
While the current liquidity issues are not expected to turn into a mass investment freeze like that encountered during the GFC, it is still a worrying sign that can leave a nasty taste in the mouth for anyone who genuinely needs the money, or simply wants to exit an investment.
Forced sales can spread the damage
Like all such difficulties, the effects can spread further out as forced sales start to worsen price falls and can even weaken the position of fund managers with a mix of listed and unlisted funds.
There can even be peripheral effects on other types of assets and investments as investors who are effectively trapped in a property fund liquidate other assets that they would otherwise have held for the long term.
Of course, there are also opportunities born out of problems, with opportunistic or patient providers of capital able to get some great deals and enjoy the eventual turnaround.
Some of the investors affected have money in the Charter Hall Direct PFA Fund or Centuria Capital, although many other unlisted funds have also been hit.
In the first case, the $2.5 billion office fund saw 15% of investors trying to exit at the five-year liquidity event last August have so far received just a quarter of their money.
Centuria Capital told investors in its Centuria 25 Grenfell Street Fund that distributions will be suspended for the 2024 financial year.
The reasons include a major tenant moving out, the need for a major refurbishment of the Adelaide building and negotiations to increase the debt that are “protracted due to the material rise in interest rates and its (NAB’s) negative outlook on the office sector.”
These are just two examples of what is thought to be a large and growing issue across the unlisted office property sector.
COVID pandemic hurts office values
Analysts who cover the unlisted property sector say that the major problems are concentrated in the office funds, due to the much lower demand created by the pandemic and the continuing trend for people to work from home.
Those trends have caused a mild run in some of the office funds and several of them are getting closer to freezing or limiting redemptions.
Planned redemptions spreading out the effect
One of the lessons the unlisted funds learned during the GFC was that it is in nobody’s interest – and particularly investors – to force prices lower by launching into panic sales or slashing valuations too far.
Instead, they favour much clearer redemption plans which treat investors equally but might limit redemptions to space them out over a number of years.
Forming an orderly queue and perhaps waiting for a few years is a painful experience but given the sometimes-rapid cycles of interest rates and property values, perhaps this is the best possible result for everybody.
You never know, perhaps there might be some value to be found if you are a buyer rather than a seller at the moment.