Q4 | Torys QuarterlyFall 2021

Real estate and open-ended funds: latest trends

In the current climate, real estate, infrastructure and other longer-term investments are gaining popularity among private equity investors. As a result, new trends are emerging with respect to fund types—one example is the open-ended real estate fund. Open-ended real estate funds offer advantages similar to open-ended funds for other assets classes, including longer-term investing horizons with ample time to pursue emerging real estate trends, the ability to liquidate assets more easily in line with such trends and more periodic redemption opportunities for investors.

Key considerations with open-ended funds

Open-ended funds are also able to perpetually raise capital, which enables the sponsors to continue to build the portfolio. In our experience, open-ended real estate funds are particularly attractive where the underlying assets are core real estate assets with stable cash flows.

Lock-up periods and determining NAV

One challenge is to fix the appropriate lock-up periods (i.e., 2-5 years) so that a fund manager does not need to liquidate assets or use new subscriptions to support redemptions and instead redemptions can be supported by the income-producing assets. Another challenge is relative to the determinations of the NAV of the portfolio given that investors are brought in over time at the then-NAV. Given the illiquid nature of the real estate assets in an open-end fund, the determination of an accurate NAV is critical and may dictate the frequency at which new investors are admitted. The determination of NAV could also impact the calculation of the performance fee as well given that a periodic performance fee often includes the NAV of unrealized assets.

Factors for investors

Investors are very keen on seeking out club deals, sidecar and co-invest opportunities with successful sponsors and we are seeing this trend continue in a variety of open-ended real estate funds across various international markets—namely where there the portfolio construction requires a diversification of assets. There is a focus on targeted and direct deal-by-deal investments in real estate assets, which is attractive to investors as fees for co-invests are often lower and gives those sponsors who are able to offer these opportunities leverage.

COVID-19 has transformed the real estate industry, creating a range of emerging opportunities and developments, from prop tech, clean buildings, the changing dynamic of our work and personal spaces to supply chain and logistics considerations.

There also is a continued focus on environmental, social and governance considerations—investors are increasingly expecting fund managers to report on key metrics relating to ESG considerations as they seek out investments for the fund. Particularly in respect of open-ended funds and the longer term horizon of these assets, investors have a decreased appetite for risk when it comes to these matters and are becoming increasingly focused on investments which are climate-friendly and socially and economically responsible and sustainable in the long term. In the real estate space, these include things like smart, energy-efficient buildings, affordable housing and inclusionary considerations and efficiencies relating to development and construction.

Flexibility to address future opportunities

Despite the illiquid nature of real estate investments mentioned above, one of the advantages of open-ended real estate funds is the ability to invest in—and divest of—assets over time in line with emerging trends in the market. As an example, COVID-19 has transformed the real estate industry in a variety of ways and fund sponsors and investors are equally attuned to these emerging opportunities, from prop tech, clean buildings, the changing dynamic of our work and personal spaces to supply chain and logistics considerations. There is also emerging interest in alternative real estate investments such as seniors housing, student housing, warehousing, data centres and life sciences / innovation centres and campuses. Open-ended real estate funds are vehicles that are well-suited to exploring these and other opportunities as they emerge.


 To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2021 by Torys LLP.

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