European real estate funds face retail investor withdrawals of $13 billion, with funds redirected to infrastructure and credit
As of March 2023, retail investors net redeemed €11.44 billion (approximately $13 billion) from European real estate funds, an increase of 20% compared to the previous 12 months. Rising default rates and the interest rate hike cycle have affected the industry's attractiveness, leading investors to exit early. Meanwhile, changes in work patterns and environmental regulations are reshaping the value of commercial real estate, resulting in increased redemption pressure. Several fund companies, such as St James's Place and Aegon, have begun to liquidate or close related products, with funds flowing into more robust assets like infrastructure and private credit
According to Zhitong Finance APP, European real estate funds are experiencing a severe capital cold wave. According to the latest data from Morningstar, as of March this year, retail investors have net redeemed €11.44 billion (approximately $13 billion) from real estate funds registered in the region, an increase of 20% compared to the previous 12 months. This globally authoritative fund tracking agency pointed out that since February 2023, euro-denominated real estate funds have been in a state of net outflow.
Under multiple pressures, the trend of investors "voting with their feet" has become increasingly evident. On one hand, the rising default rate and the interest rate hike cycle directly impact the industry's attractiveness. The long transaction cycle and the lagging nature of valuation adjustments in commercial real estate make it difficult for fund net values to reflect real market risks in real-time, and this information gap prompts investors to choose to exit early to avoid risks. On the other hand, changes in work patterns and stricter environmental regulations are reshaping the value system of commercial real estate, leading to significant valuation declines for office assets held by many funds, resulting in a vicious cycle of redemption pressure and asset disposal difficulties.
A wave of fund liquidations has quietly begun. UK wealth management giant St James's Place Plc is gradually liquidating its real estate fund portfolio after experiencing large-scale redemptions; Dutch insurance company Aegon Ltd. announced the closure of related products due to its funds consistently remaining below the breakeven point; Goldman Sachs also terminated a global real estate securities fund that had lost money for five consecutive years last month.
It is noteworthy that the trend of capital shifting is significant. In the first quarter of this year, alternative real estate funds managed by DWS Group faced approximately €500 million in redemptions, with funds clearly flowing towards infrastructure and private credit, which are seen as more stable asset classes.
The industry inflection point has yet to emerge. Although the market generally expects that central bank interest rate cuts will boost real estate prices, the reality is sobering: Green Street data shows that due to the weakness in international tourism, the valuation of U.S. hotel properties fell by 2.8% in April, leading to a 0.5% decline in the overall commercial real estate index.
This pessimistic sentiment has transmitted to the European market, where the management scale of European real estate funds has shrunk to €156 billion, a decrease of approximately €44 billion from the peak in February 2023.
"Although we have processed a large number of redemption requests, we expect the outflow of funds to continue," admitted DWS Group CEO Stefan Hoops during the earnings call, "However, from an asset allocation perspective, the current valuation levels make us cautiously optimistic about the medium to long-term outlook." This industry adjustment, which began with capital movements, is testing the asset disposal capabilities and strategic transformation determination of European real estate funds
