The money came for rent

Last year was exceptionally successful for the segment of retail closed-end mutual funds of commercial real estate. The volume of assets under their management increased by 2.3 times, to 92 billion rubles. Investors are attracted by the low volatility of such assets, as well as the continued rental flow against the backdrop of the exit of some international companies from the Russian Federation and the downturn in the economy.

In 2022, the inflow of funds to retail closed-end mutual funds specializing in commercial real estate increased sharply. According to Kommersant’s estimate, based on the reports of such funds, their assets more than doubled over the year, from 39.6 billion rubles. up to 91.9 billion rubles. Only in the fourth quarter, assets increased by almost 23 billion rubles, which is 3 billion more than in the third quarter and comparable to the total attraction for 2020–2021.

At the same time, only one new player appeared on the market, and the main inflow of funds came from closed-end investment funds of the management companies Modern Real Estate Funds (MC SFN, 50.3 billion rubles) and Savings Plus (MC JV, 1.4 billion rub.). This happened against the backdrop of a general decline in demand for open-ended and exchange-traded mutual funds, from which private investors withdrew more than 30 billion rubles in a year.

Turbulence in the stock markets and the blocking of Russian portfolios have influenced the growth of investor interest in real estate-oriented products, said Vladimir Zelenov, head of the corporate clients department of Alfa Capital Management Company. According to Marina Kharitonova, General Director of Accent Capital, closed-end investment funds of commercial real estate seem to be the most stable forms of investment, since the volatility of the shares of such funds is much lower than the assets of the stock market. According to the reported companies, all of them continued to generate positive cash flow, while the investment income paid to shareholders, for the most part of the funds, was 9-13%, taking into account the revaluation of real estate, some funds showed a total return of 20-36%.

The massive influx of new funds into closed-end investment funds of rental real estate affected the structure of portfolios. If at the end of 2021 the dominant share in them was occupied by real estate, which accounted for more than 70% of the total NAV of funds, or 24.5 billion rubles, then by the end of 2022 the figure fell to 40%, while investments grew to 38.7 billion rub. The share of funds placed on deposits with banks and invested in securities increased over the year from 26% (9.3 billion rubles) to 56% (55 billion rubles).

First of all, the income that managers receive from tenants during the quarter is placed on deposits. “Shareholders receive rental income every quarter, and until the moment of payment, payments from tenants are accumulated on deposits, which slightly increases the final profitability of our shareholders,” says Dmitry Reshetin, Commerce Manager of Modern Real Estate Funds Management Company.

In addition, funds are stored on deposits that the management company has not yet managed to invest in real estate. According to Vitaliy Balanovich, General Director of Balance Asset Management, choosing an object, conducting an assessment, due diligence, preparing a sale and purchase agreement – all this takes about three to six months and depends on the complexity, volume and life stage of the objects, as well as the seller’s quickness. “Placing temporarily free funds on deposits for this period is a normal practice,” notes Mr. Balanovich.

In addition, the market had to adjust to new market conditions against the backdrop of the exit of foreign companies and the decline in the economy. “The A-class suffered to a greater extent, in which there were many western tenants or Russian tenants connected by logistics and business processes with western companies,” notes Mr. Balanovich.

According to Marina Kharitonova, in the second half of 2022, the market began to adapt, which led to an increase in investment activity in the real estate market in the fourth quarter. Therefore, in the coming quarters, the market expects new transactions with commercial real estate at the expense of shareholders. As Vladimir Zelenov notes, attractive real estate is “enough to meet both current and future demand.”

Vitaly Gaidaev