14 December 2016, Amsterdam – Nearly 25% of European funds have experienced secondary trading, according to recent research published by INREV. The Secondary Trading and Liquidity Study reveals that secondary trading in both open end and closed end funds has become an established part of the overall real estate investment landscape, as opposed to a marginal activity.
The market in secondary trading of units in non-listed real estate funds was worth around €9 billion in 2015. Between €2 billion and €4 billion of this total is estimated to have been traded in European funds.
The study also identifies a continued upward trajectory for secondary trading, citing the industry rule of thumb that at least 3% of capital raised in the primary market will be traded on the secondary market over the next five years. Of the €92.6 billion of new capital that was raised for European non-listed funds from 2011 to 2016, at least €2.8 billion will likely hit the secondary market between now and 2021.
“With a current value of €36 billion, private equity serves as a useful parallel for the possible growth potential of secondary trading in non-listed real estate,” said Henri Vuong, INREV’s Director of Research and Market Information. “US public pension funds seem to have become more comfortable with the idea of secondary trading in general. This could have a significant impact on the volume, value and profile of the market. And, if private equity is a reliable indicator, secondary trading in non-listed real estate seems set to grow.”
Reach, scale and value
Within Europe, secondary trading is most prevalent in the UK. For closed end funds, the bulk of interest is in single sector and value added funds, whereas for open end funds, multi-sector and core funds dominate.
For the period 2010 to 2015, 71.6% of all secondary trades in closed end funds and 72.6% of all secondary trades in open end funds was accounted for by the top five funds in each category. And while activity levels on the secondary markets vary over time, the average value of matched secondary trades in UK open end funds is around £540 million per year.
In general, transactions vary considerably in size. There is an active secondary trading market for retail investors in German open end funds facilitated by the Hamburg Stock Exchange, where average trades reach about €0.3 million. Institutional investors will typically trade directly with one another at average values of approximately €5 million per trade. The largest single institutional secondary trade in 2015 hit a reported €2.8 billion.
The study reveals interesting details about pricing too. Historic data shows that 55% of all trades in the period September 2009 to March 2016 were done at net asset value (NAV), while 22% concluded at a premium to NAV and 23% at a discount to NAV. The average premium to NAV was 1.2% with a maximum of 20.5%. The average discount to NAV was -2.6%, with a maximum of -55%.
Trading benefits
Pension funds and insurance companies make-up the largest group of investors in the secondary market. However, secondary trading also appeals to a broad range of smaller institutional and retail investors attracted by the many benefits it offers, such as:
- Increased investor liquidity
- Portfolio management and re-balancing
- Reduced queuing for subscriptions and redemptions
- Improved governance structures and transparency
- Access to closed end funds when capital raising has finished
- Ability to buy at a discount to NAV
“This study provides useful evidence in support of the idea that investors increasingly see secondary trading as one way to nullify the perceived ‘lobster pot effect’ of investing in real estate funds. To that extent it’s encouraging for the future prospects of non-listed real estate funds as a key choice for institutional investors. But while there’s more to learn, we should remain wary of the potential interpretation that increased investor liquidity and continuing illiquidity premium accrual can both be satisfactorily delivered,” added Vuong.
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For further information, please contact:
Justin St Clair-Charles, justin.scc@firstlightpr.com, +44 (0) 20 3617 7233
Notes to Editors
About the Secondary Trading and Liquidity Study
INREV’s Secondary Trading and Liquidity Study is based on data from three separate sources: the INREV Annual Index of funds with a total GAV of €187.8 billion at year end 2015; the secondary trading platform, PropertyMatch, comprising 1,000 transactions with a combined value of £4.5 billion; and the Hamburg Stock exchange, comprising 15,000 transactions with a combined value of €4.6 billion.
The survey compared and contrasted data from all three sources and was supplemented by qualitative interviews with active participants in the secondary trading market, including: Almazara, Aviva Investors, JLL, Landmark Partners, Partners Group, Tullet Prebon, Willis Towers Watson and PropertyMatch.
About INREV
INREV, the European Association for Investors in Non-listed Real Estate Vehicles, was launched in May 2003 to act for investors and other participants in the growing non-listed real estate vehicles sector. The non-profit association is based in Amsterdam, the Netherlands. INREV aims to create a forum for the sector and increase the transparency and accessibility of non-listed vehicles, to promote professionalism and best practice and to share and spread knowledge. INREV currently has 388 members drawn from leading institutional investors, fund managers, banks and advisors across Europe and elsewhere. In 2015, 40 new members joined INREV. For further information, please visit https://www.inrev.org/