Canada Life Assurance Co. has temporarily halted all investor activity on its Canadian real estate funds as the novel coronavirus rattles global property markets.
Canada Life announced on Friday it was “in the best interest” of investors to place a temporary suspension on contributions, transfers and redemptions for its Canadian real estate investment funds.
The spread of COVID-19, the disease caused by the coronavirus, has affected global property markets, making it difficult to value the properties with the same degree of certainty as usual, Canada Life said in a release.
As a result, the market uncertainty affects the company’s ability to calculate the unit price and creates “a material risk” that investments may not continue to be valued appropriately.
To mitigate that risk, Canada Life has suspended contributions, redemptions and transfers from the Great-West Life Canadian Real Estate Investment Fund, the London Life Real Estate Fund (2.17G), the Canada Life Real Estate Fund and the London Life Real Estate Fund (5.191G).
The first two funds include holdings in office, retail, industrial and multifamily residential properties across Canada, while the other two funds hold assets in the first two funds and therefore have value tied to the underlying properties.
Unlike most retail real estate funds, which invest in public securities such as units of real estate investment trusts and shares of real estate operators, the Canada Life funds invest directly in real estate properties. For example, the Great West Life fund has approximately $6.4-billion in assets under management and invests in projects such as the Calgary Watermark tower and the Creekside Crossing complex in Alberta.
Kim Inglis, an associate portfolio manager with Raymond James, said drastic measures such as suspending redemptions help prevent fund companies from having to sell what they can at prevailing prices, as opposed to the price at which they would prefer to sell.
“[Force selling] can disrupt the balance in the underlying portfolio and end up exacerbating losses,” Ms. Inglis said. “It also obviously impacts those investors who want to continue holding the asset through the volatility. Temporarily suspending redemptions is an attempt to avoid that domino effect.”
Canada Life said the suspension will remain in place until market conditions have stabilized enough to "determine valuations with greater certainty” and the company is “comfortable” with the funds’ liquidity positions.
“Our Canadian real estate funds have performed well over many years,” Canada Life chief executive officer Paul Mahon said in a statement. “The temporary suspension was put in place to protect the long-term interests of all unit-holders during this period of economic uncertainty. We have managed real estate funds for four decades, and we continue to believe they are an excellent component of a well-balanced, long-term investment portfolio.”
The risk of real estate funds being suspended across the entire Canadian retail estate asset class is low, said Dennis Mitchell, CEO of Starlight Investments Capital LP, an investment management firm that specializes in real estate securities.
“The vast majority of real estate mutual funds owned by Canadian investors allocate capital to shares/units of listed real estate companies, that in turn own properties," Mr. Mitchell told The Globe and Mail. "These mutual funds are very liquid and should be at significantly less risk of suspending redemptions and distributions.”
This isn’t the first time Canada Life has had to suspend its real estate funds. In 2008, the funds were frozen for a period of time during the financial crisis.
Investors looking to access direct property exposure for their portfolios will have to live with the inability to get in and get out of the investment any time they want, said Dan Hallett, vice-president of research at HighView Financial Group.
“Stuffing an illiquid asset inside of a liquid structure will eventually lead to a liquidity freeze,” Mr. Hallet said. “That’s what’s happened here. And it’s at least the third time this has happened with retail real estate funds holding property directly.”