US Real Estate Funds Struggle as Redemption Requests Soar

The Illinois State Universities Retirement System (SURS) has announced its decision to redeem its $265 million investment from JP Morgan Asset Management’s open-ended core US real estate fund. This move comes amidst the fund’s underperformance and the recent departure of its senior portfolio manager, Kim Adams, who has since joined Clarion Partners to focus on global alternative property strategies, according to a report by Jon Peterson with IPE Real Assets.

SURS is the latest in a growing trend of institutional investors pulling capital from open-ended US real estate funds as performance challenges mount. According to a report by investment consultant Verus for the Kern County Employees’ Retirement Association, redemption queues for these funds have risen dramatically from $10 billion at the end of 2021 to over $39 billion by the close of 2023.

According to the IPE report, the JP Morgan Strategic Property Fund posted a net return of -5.7 percent through March of this year, underperforming the NCREIF ODCE index, which returned -2.4 percent. Similarly, the ASB Allegiance Real Estate Fund posted a net return of -6.9 percent during the same period. Verus attributes this underperformance to a slowdown in the transaction market, which has delayed redemption payouts. In 2023, only $5.7 billion was paid out, representing less than 15 percent of the outstanding redemption requests, and the estimated time for full redemption payments exceeds a year.

This trend is not isolated to JP Morgan. In a separate instance earlier this year, the UBS Trumbull Property Fund reported a redemption queue amounting to 60.4 percent of its $10.8 billion net asset value at the end of 2023. A report from investment consultant RVK, prepared for the City of Jacksonville Employees’ Retirement System, cited the UBS fund’s underperformance across multiple periods and a lack of diversification in its portfolio, IPE added. The fund is heavily concentrated in multifamily (41 percent) and industrial (35 percent) assets, leaving little room for investments in sectors currently attracting interest, such as self-storage, student housing, and medical offices.

Despite UBS’s intention to increase exposure to non-core sectors and value-add investments, the large redemption queue has restricted the fund’s liquidity, limiting its ability to sell assets quickly and meet investor demands. Other investors, such as the City of Jacksonville, are following suit, redeeming significant portions of their investments in various funds, including $30 million from the Harrison Street Core Property Fund and $40 million from the Principal US Property Account.

The growing redemption queues and underperformance of core real estate funds underscore a broader shift among institutional investors toward non-core and alternative property strategies. With the transaction market slowing and redemption delays expected to persist, pension funds are re-evaluating their real estate allocations, favoring sectors and strategies that offer higher returns and diversification potential.