Valuation uncertainty, not liquidity, driver behind real estate fund suspensions  

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A red house with a question mark symbol. Housing problem concept. 3D Rendering © inkdrop /123RF Stock PhotosDuring the global financial crisis, certain real estate funds were suspended because of liquidity constraints, but during the coronavirus downturn, it’s valuation uncertainty that’s causing suspensions, says Steve Marino, senior vice-president of portfolio management at Great-West Life Realty Advisors Inc, a subsidiary of the Canada Life Assurance Co.

On March 20, 2020,  Canada Life announced a temporary suspension on transfers, redemptions and contributions for two of its open-ended real estate funds. “The primary driver related to our suspension was the material valuation uncertainty that our management team decided was appropriate to take action upon,” he says.

With so much uncertainty, the company, as a fund manager, had a fiduciary responsibility to suspend trading, adds Marino.

Both of the funds in question were also suspended during the global financial crisis. “The events related to the global financial crisis were more so specifically liquidity events that impacted the funds. This event is not related to liquidity. This event is related explicitly to material valuation uncertainty and that decision to protect the funds and all of its investors.”

The current situation caused by the coronavirus is unprecedented with a large velocity of change stemming from fiscal stimulus, emergency order restrictions and a material void of transactions in the marketplace, he says.

In addition, even appraisals are being qualified since appraisers can’t value real estate with the regular level of certainty. “When we think about trying to look forward and understanding how to get back to an era of appropriate certainty, we are trying to formulate a strategy to look at both subjective and objective signposts that can help to determine that there are conditions that are normalizing or stabilizing,” says Marino, noting signs that normalcy is on the horizon might include lifting emergency orders and seeing other transactions start to occur in the marketplace.

The funds that Canada Life has suspended include both institutional and retail investors, who have reacted well to the announcement to date, he notes. “Our decision was based on making sure that we’re taking action in the best interest of the fund and all of its investors.”

And over the long term, Marino believes real estate will continue to be well-positioned as part of a diversified investment strategy.

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