Investors who moved into private assets such as real estate and loans are now facing issues with illiquidity and getting their money back.Evan Buhler/The Canadian Press
Nicola Wealth Management Ltd., a $17.2-billion money manager, is reducing monthly distributions on its two main real estate funds and is warning clients that it may delay redemptions because too many investors are trying to withdraw their money.
Nicola Wealth is the latest asset manager to flag potential redemptions as investors try to reduce their exposure to real estate, and the industry struggles with relatively higher borrowing costs and other issues like falling apartment rents.
Nicola Wealth chief executive officer John Nicola said the number of investors asking to redeem their money accounts for less than 5 per cent of the funds’ total assets – a level he says is low by industry standards, but too high by company standards. He blames contagion owing to publicity around the redemptions in other companies’ real estate funds.
“Quite frankly, we’ve never seen this before,” Mr. Nicola said in an interview.
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In a notice sent to investors on Wednesday, the wealth manager told clients it is taking steps to “ensure the long-term strength and resilience” of its $1.29-billion Nicola Canadian Real Estate LP and its US$1.498-billion U.S. Real Estate LP.
“We are notifying unitholders of potential delays in redemptions,” the company wrote, flagging its two main real estate funds.
“Looking forward we foresee that cash management requirements may result in partial or delayed redemptions.”
The notice also said Nicola Wealth is reducing monthly distributions on the two funds, effective Sept. 30. Distributions for the Nicola Canadian Real Estate LP will drop to 25.85 cents a unit from 48.19 cents, while the U.S. Real Estate LP has been lowered to 44.32 US cents a unit from 70.22 US cents.
The company is allowing investors who want to maintain their current level of monthly cash flow to elect to use a withdrawal plan to redeem units to make up the difference in reduced income.
Nicola’s warning was sent to investors as property owners and developers struggle with higher borrowing costs and other problems such as weak demand for office space and falling home rental rates.
Other private fund managers have limited the amount of money investors can remove. Earlier in September, private real estate fund Centurion Apartment REIT told its investors that it was putting limits on redemptions, saying its fund performance was holding up but that widespread investor fears about private investments had greatly increased requests for redemptions.
Centurion has nearly $8-billion in assets under management and focuses on rental apartments and student housing properties along with mortgage and equity investments in developments in Canada and the United States.
In August, Trez Capital Mortgage Investment Corp., one of Canada’s largest private commercial mortgage providers, halted redemptions from five of its funds.
Nicola’s Canadian Real Estate fund has 43 per cent of its assets in industrial properties, according to its second-quarter report. Apartments, self-storage buildings, real estate development, and office buildings each accounted for between 9 and 13 per cent of the total portfolio, the report said.
Mr. Nicola said the potential delays for redemptions are not owing to any concerns with the direct holdings in the two funds, and his real estate team is not looking to sell assets.
“The market is actually not at its best – especially in Canada – for potentially liquidating certain assets, especially when they have 95-per-cent to 100-per-cent occupancy,” he added.
His investment team is advising clients who are considering a redemption to hold off until real estate markets are stronger.
Nicola’s most recent quarterly report shows the Canadian real estate fund had a return of 0.9 per cent in the six months ended June 30, while the one-year return was 1.5 per cent. The three-year return was 2.4 per cent and the five-year return was 7.4 per cent.
Nicola’s U.S. real estate portfolio, with 54 per cent of its holdings in rental apartments, posted losses in the past year.
The fund reported a loss of 2 per cent in the six months ended June 30, while it lost 1.3 per cent over the prior 12 months. That compares with a three-year return of 2.2 per cent and a five-year return of 6.8 per cent.
However, Mr. Nicola says both funds are outperforming much of the industry, which has been “muted for quite a few years.”
“We are easily in the top quartile in terms of our peers and certainly far better than public markets and REITs in the U.S. and in Canada,” he added.
Investors have increasingly moved into private assets such as real estate and loans, but they are facing issues with illiquidity and getting their money back. Romspen, which specializes in short-term commercial mortgages in Canada and the United States, has prevented investors from withdrawing funds since November, 2022.
Last year, one of the country’s most experienced commercial real estate investors, KingSett Capital Inc., halted redemptions and distributions on its main Canadian real estate income fund. At the time, the fund said it was committed to restarting distributions this December.