(Bloomberg)—Funds investing in commercial property pose a threat to financial stability after growing significantly over the last decade, according to the European Central Bank.
The net asset value of the real estate investment funds more than tripled to more than €1 trillion ($1.1 trillion) in the past 10 years, boosting their interdependence with property markets, the ECB said Monday in its Macroprudential Bulletin.
It warned of a mismatch as investors have frequent opportunities to withdraw money, while the assets themselves are quite illiquid. That can make the vehicles vulnerable to runs like those that reverberated through the financial system recently.
Instability here “could therefore have systemic implications” for commercial real estate, “which could in turn affect the stability of the wider financial system” and the real economy, the ECB said.
Researchers pointed to the Blackstone Real Estate Income Trust as a recent example of a fund that had to limit redemptions as investors pulled money out. Concerns about the real estate market could prompt further withdrawals, they said.
Commercial property has suffered as the pandemic fueled work-from-home policies and e-commerce. Now, an uncertain economic outlook and rapid interest-rate increases to combat inflation pose additional risks.
Rules should be developed to help funds better “manage spikes in liquidity demands and to internalize the costs of redemptions which can arise during a market stress,” according to the article. That could include lower redemption frequencies and longer investor notifications, it said.
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