Market closed-end real estate mutual funds continue to actively attract new clients

Market closed-end real estate mutual funds, aimed at unqualified investors, continue to actively attract new clients. At the end of 2023, the volume of assets of such funds increased one and a half times, to 143.9 billion rubles, and the number of shareholders doubled. Although the profitability of closed-end mutual funds is noticeably lower than current deposit rates, interest in the funds will continue. Including thanks to the annual indexation of rental rates.

Funds for growth

According to estimates by Parus Asset Management, at the end of 2023, the assets of market closed real estate mutual funds for unqualified investors increased by 50.8 billion rubles, to 143.9 billion rubles. According to Kommersant’s estimates, the main increase in assets was provided by funds managed by the management company “Modern Real Estate Funds” (from 45 billion rubles to 106.7 billion rubles) and the management company “Sberezheniya Plus” (from 6.5 billion rubles to 15 billion rub.).

Unlike 2022, when not a single fund was formed on the market, in 2023 four new closed-end real estate mutual funds appeared, including from a new participant in this market segment, Balance Asset Management Management Company.

The total number of “non-qualified” real estate funds (taking into account the termination of the PNK-Rental closed mutual fund) reached 34.

The number of Russians investing in such funds is also growing steadily. According to the Bank of Russia, over the 11th month the total number of shareholders almost doubled, to 150 thousand people. The number of shareholders in the closed mutual fund “Modern Rental Business 7” (up to 71.3 thousand people) and closed mutual fund “Tinkoff Square Meters” (up to 54.4 thousand people) increased the most.

Deposit competition

Interest in such financial instruments remains even against the backdrop of an increase in the key rate. In the second half of 2023, the Central Bank raised the rate five times by a total of 8.5 percentage points, to 16%. At the same time, banks raised deposit rates. By the end of the year, the average maximum rate on deposits of the largest banks reached 14.75% per annum.

At the same time, according to Parus Asset Management Management Company, the profitability of closed-end mutual funds for warehouse real estate at the end of last year amounted to 11-12%, retail real estate funds – 8-9%, office real estate funds – 6-7%.

However, this is comparable (and even higher) with bank rates a year ago. According to the Central Bank, the average maximum rate on deposits of the largest banks at the beginning of 2023 was slightly above 8% per annum. But in the future it will be more difficult to compete with deposit rates.

Renting is for a long time

When choosing such instruments, it is worth considering their other features, in particular the long-term nature of lease agreements, which reduces flexibility compared to deposits. Moreover, the most long-term contracts are concluded for warehouse real estate. As noted by Ekaterina Vasilchenko, project director of the SFS Management Company, in the warehouse market the tenant is interested in maximizing the planning of his cash flows, as well as in preserving his capital investments in the project, so he strives for a long-term contract of up to ten years, and the lessor strives for annual indexation of rates.

The duration of lease agreements in first-class business centers is lower. Even for large tenants it ranges from three to seven years, notes Capella Investment Management partner Andrey Bogdanov

In large shopping centers, anchor tenants (as in the case of warehouse real estate) usually enter into long-term contracts with a term of five to ten years.

The shortest contracts are usually in the case of street retail on the ground floors of residential buildings. “In such properties, the tenant carries out minimal repairs and tries to fix the possibility of terminating the contract on his own initiative, which from the point of view of the landlord’s risks is equivalent to a short-term contract,” notes Ms. Vasilchenko.

Saving indexing

However, many lease agreements provide for the possibility of indexing rates. In the case of warehouse and office real estate, the main benchmark is inflation for the previous period. Therefore, the more prices increased during the previous year of the contract, the more noticeably the rental cost for the next year will increase.

“Indexation of rental rates in contracts is stipulated annually in relation to inflation, either in the form of a fixed rate of expected inflation, for example, during periods when inflation is “anchored”, stable and well predictable, or to real inflation, when the predictability of the latter decreases,” notes Mr. Bogdanov . For example, in 2023, according to Rosstat, inflation was 7.42%, in 2022 – 11.9%. At the same time, the Central Bank’s inflation forecast for 2024 is only 4–4.5%.

In the case of retail real estate, rental rates often include additional conditions, such as turnover. That is, the higher the tenant’s income, the higher the rental rate will be. This is why location is so important in the case of retail real estate funds, since in case of downtime, the rental flows of the shopping center will fall. “Previously, the share of the fixed part in the rental rate of retail real estate was higher than the variable part, but after the events of recent years, the proportion has changed,” notes Andrey Bogdanov.

The terms of long-term contracts usually provide for rate revisions once a year, but unscheduled revisions are also possible.

“For example, during the coronavirus pandemic, in almost all sectors, lease terms were revised or vacations were provided,” notes Vladimir Stolnikov, head of the alternative investment management directorate at Alfa Capital Management Company.

Although easing lease terms leads to a deterioration in fund performance, managers most often accommodate tenants facing problems, since an emergency replacement of a tenant leads to an increase in operating costs. “If the search takes too long, and in shock periods it is difficult to find a new tenant, then the landlord begins to incur losses,” explains Vladimir Stolnikov.

Vitaly Gaidaev