When liquidity dries up for supposedly liquid funds

When people invest with us, I always warn them not to expect their money back at any particular time.

Why? Because real estate is a fundamentally illiquid asset (eg it takes a long time to sell). As long as you’re not a forced seller, you’l probably do very well… but you can get killed if you need your money immediately.

Some mutual fund investors in the UK are apparently learning this lesson in a pretty painful manner today.

Per the Wall Street Journal [subscription required], five funds which invest in UK commercial property have suspended investor redemptions since the Brexit vote. That means investors can’t get their money out… which is supposed to be one of the virtues in investing in a publicly traded fund like this.

Why can’t they get their money out? Because the funds’ money is invested in real estate and you can’t easily liquidate properties to generate cash to fund redemptions. So, when large numbers of investors want to pull out, there’s no way for the funds to oblige.

Even worse: When the funds do manage to liquidate their portfolios, they will be doing so under duress, meaning bidders will know they are dealing with distressed sellers and will act accordingly.

It’s kind of amazing to me that these funds are allowed to exist, period. There’s just too much of a mismatch between the short-term nature of investment in publicly traded vehicles and the long-term nature of commercial real estate.

Anyway, word to the wise: If you’re going to put money into real estate, make sure it’s money you don’t need to see again at any particular time. Otherwise, you’re in for a world of hurt.