Centurion Apartment REIT, a private real estate fund with nearly $8-billion in assets under management, is substantially limiting investor redemptions, stoking contagion fears as skittish retail investors increasingly try to sell out of similar products across Canada.
Late last week, Centurion told clients that ordinary course redemptions from its flagship fund will be limited to a total of $50,000 per month for the entire fund. Clients who desperately want out will have the option to switch their money into a newly created note that will pay back a total $20-million per month.
However, the new note will pay investors a lower interest rate than the fund – 2.57 per cent annually versus 4.12 per cent – and cannot be held in tax-sheltered accounts, such as RRSPs and TFSAs.
Centurion’s REIT invests in rental apartments and student housing properties, as well as mortgage and equity investments in real estate developments, across Canada and the United States.
Its new redemption limits extend the woes that Canadian private real estate funds have faced since interest rates started rising in early 2022, and the number of funds struggling to pay out their redemption requests continues to grow.
Redemption limits kicked off in in late 2022 when Romspen gated its $2.5-billion Mortgage Investment Fund, and they’ve picked up again lately. In August, Trez Capital halted investor redemptions from five of its funds, which manage a total of $2.8-billion, and now Centurion has significant limits on $7.9-billion of assets.
Trez Capital suspends investor redemptions on five funds
In all, Canadian private real estate funds with at least $16-billion in assets have had their redemptions halted or limited since the troubles started three years ago, and the constraints are a warning. Funds that invest in private assets such as real estate, infrastructure and private equity are increasingly pitched to retail investors, often marketed as having better long-term returns than mutual funds and exchange-traded funds that invest in stocks.
But troubles can arise because these funds invest in illiquid assets that can’t be sold in a flash, yet investors can redeem their money regularly, often once a month or once a quarter, usually with a cap of 5 per cent of total assets each period. (Institutional private equity funds, meanwhile, often lock investors in for five to seven years.)
In an extreme case, in 2019 a prominent British fund that offered daily redemptions had to freeze £3.7-billion (then about $6.3-billion) of investor money, and in a parliamentary hearing at the time, then-Bank of England governor Mark Carney said funds that offer continuous redemptions, yet invest in illiquid assets, are “built on a lie.”
In a note to clients last week, Centurion said this is the first time in the REIT’s operating history that redemptions have been limited, and that unlike some other Canadian funds, the REIT will keep paying its monthly cash distributions.
Explaining the new limits to investors, Centurion said its fund performance continues to hold up, but widespread investor fears have affected its operations.
“The past 18 months have presented challenges across the alternative investment industry, with elevated redemption requests and tighter capital flows affecting many market participants,” the company wrote. “Several alternative investment companies have suspended redemptions, resulting in the REIT becoming a source of liquidity for some unitholders at a rate 3-4 times higher than the normal course.”
With so many Canadian investors now trapped in private funds, there is growing frustration about having to pay annual management fees throughout. To address this concern, Centurion is lowering its 1-per-cent annual fee.
“To support investors during the managed redemption period, Centurion has reduced its management fee to 90 basis points [0.9 per cent] and pledged not to redeem any of its own units,” the company wrote in an e-mail to The Globe and Mail.
Similar to a hedge fund, Centurion also charges a bonus fee, worth 15 per cent of any returns above 7.25 per cent, for strong performance in good years.