Insurers to lift real estate fund suspension

Great-West Lifeco is preparing to lift a nearly three-year-old suspension on transfers, redemptions and withdrawals on the $3-billion real estate fund it shares with Canada Life.

The move will take place on Oct. 17 and comes nearly seven months after it lifted a similar suspension on its London Life Real Estate Fund.

Alf Goodall, senior vice-president of individual marketing for all three companies, says the Great-West/Canada Life fund had $477 million in cash as of August 31, which it deemed enough to meet ongoing redemption demand from investors.

“We were able to pay out 100% of (redemption requests) and now we have enough cash on hand to meet future redemptions,” he says.

Goodall says there was no “unusual activity” following the lifting of the suspension for the London Life fund and he expects the same next month.

More than half of the London Life fund’s clients, 56%, didn’t ask to cash in their units. He says of the 44% of clients who were in search of liquidity, the vast majority of them wanted it to rebalance their portfolios.

“Most of the money wasn’t going out as cash. (Clients) saw what they felt were rebalancing opportunities into equities,” he says.

For Great-West and London Life, the suspensions marked the first time clients couldn’t move money out of their real estate segregated fund holdings.

The Great-West Life Real Estate Fund and the Canada Life Real Estate Fund are separate funds offered by the two insurance companies, which are both owned by Great-West Lifeco. The two funds, however, participate in the same collection of assets.

Goodall says the funds were frozen because cash reserves were running low and because the firms wanted to protect the integrity of the funds’ assets. Unlike typical equity or fixed income funds, real estate funds are susceptible to sudden redemptions, because of the relative illiquidity of the underlying assets.

“You have two choices. You start liquidating properties at far below their intrinsic value and then create harm to unitholders or you put a suspension in place. (The suspension) allowed us to create liquidity to meet the redemption demand in a more disciplined fashion,” he says.

It wasn’t as if investors were completely unable to access their money during the suspension. Both funds offered two one-month payback periods, during which they paid out 100% of requests.

“The key with the suspension is, the more time you have to create liquidity, the better you can create liquidity without impairing the quality of the fund going forward,” Goodall says.

Dan Hallett, director of asset management of HighView Financial Group, a Toronto-based investment counselling firm, believes Great-West and London Life made the right move in freezing the two funds.

“Inevitably, there will be times when redemptions are significant enough that they can’t be met with cash and other liquid resources of the fund. (The funds) have a very illiquid asset housed inside a very liquid structure,” he says.

In fact, two decades ago during the real estate crash of the late 80s and early 90s, many real estate funds halted redemptions and were either wound up or converted to a REIT (real estate investment trust) structure.

“It’s quite a feat that these funds lasted this long without having to freeze redemptions,” Hallett says.

Goodall believes the moves paid off with client bottom lines. From December 2008 to this past August, the total return of the Great-West/Canada Life fund was just over 9%.

“I’m pretty confident we couldn’t have done that if we didn’t have the suspension. Property values were down significantly at the time. Clients made money during a very rough market,” he says.

Goodall says similar fund suspensions occurred in Europe, providing the companies with reference points.

“If they’re properly managed and applied, they work. Demand in the real estate market was shrinking (in 2008). Property values would have had to be sold off at horrible values to create liquidity,” he says.

There are 114 properties scattered across the country in the Great-West fund, including office towers, multi-family residential units and smaller-scale buildings, such as strip malls.

Over the past two-and-a-half years, both Great-West and London Life took a very selected approach in going through their portfolio of properties and selecting ones to put up for sale at an appropriate price.

“We didn’t ever feel we got into a core asset,” Goodall says.

They also followed through on commitments to develop seven properties during the suspension period, two of which we’re subsequently sold.

“We’re not just a property manager, we’re also a property developer,” Goodall says.

Now that the suspensions have been lifted, the hope is that investors will once again feel confident and comfortable putting their money in the two funds.

“To get real estate as an investor is really difficult. You’d need hundreds of millions of dollars. You can think about putting in $5,000 or $100,000 to get a diversified real estate portfolio with little volatility,” he says.