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The Globe and Mail

Great-West lets investors back out of real estate fund

Great-West Life Assurance Company is a unit of Great-West Lifeco.

Eighteen months after freezing out investors who wanted to pull out of a commercial real estate fund at the height of the financial crisis, Great-West Life may finally allow them to take their money and run.

But how much money each one receives depends on how eager they are, as a group, to get out of the Great-West Life Real Estate Fund, because the fund's main assets are buildings that can't be readily converted into cash.

The fund's managers suspended redemptions in December, 2008, on the fund, which has 155 properties with a stated gross market value of $3.37-billion as of March 31. The fund's managers have been in selling mode since, and had $425-million in cash at the end of the first quarter.

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If investors want to pull out considerably more than that, the fund would again find itself unable to meet those requests. To prevent insolvency in the fund, Great-West might allow each person to withdraw only a percentage of the money they have tied up in the fund.

The fund's uncertain footing is a stark reminder of the fragility of the country's commercial real estate market. With vacancy rates climbing and rental rates slipping, office towers and retail complexes are generally worth less today than before the crisis took hold. The saga also illustrates what some say is a crucial flaw of applying mutual funds and segregated funds - which are meant to be relatively liquid investments - to real estate, which is not.

"It's amazing these type of funds still exist because the structures don't make any sense," said Dan Hallett, a fund analyst at Highview Financial Group. "When things turn quickly in the economy and people want quick access to their money, you clearly run into problems."

Putting assets that are hard to sell into a fund structure creates the potential for such freezes, and that's one reason that there are only a handful of such funds in Canada, Mr. Hallett said.

During the last real estate downturn in the early 1990s, some funds converted to real estate investment trusts to eliminate the problem. Because REITs are publicly traded, an investor who wants money back can sell units to another investor, meaning an REIT doesn't have to sell assets to fund redemptions.

Investors were asked to place their requests with fund manager Great West Realty Advisors over the past month; with Friday's deadline now passed they will begin crunching the numbers to determine whether they can meet the demand.

"We're selectively selling real estate in a disciplined manner in an effort to meet our clients' needs while still doing what is best for the fund and unit holders in the long term," the company said in a statement. "We have sold a number of properties, and other sales are planned or in progress."

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While selling may not have been the fund's preference, George Carras of RealNet Canada Inc. said the fund is lucky the Canadian real estate market held up as well as it did through the recession. While values and volumes of sales decreased, there was no wave of distressed sales to drive prices down across the country.

And the fund's ability to sell properties in British Columbia markets that fared better through the recession - instead of properties in other parts of Canada where property values suffered - shows that it was well diversified and prepared to move quickly.

"They have actually been very savvy about the whole thing," said Mr. Carras, who added it was possible the funds could also convert into REITs to solve their redemption issues. "You never want to sell into a down market, but if you have to then it makes sense to sell properties in some of the stronger markets."

Great West Realty Advisors also suspended redemptions of the smaller $1.5-billion London Life Real Estate Fund in December 2008, although its unit holders were able to access up to 60 per cent of their investment the same month.

Only 20 per cent of the London Life fund's investors wanted their money moved out of the fund, the company said, but didn't specify what percentage of the fund's assets they held. Ninety per cent of those who wanted to move their money opted to transfer their money into another of the company's funds.

They'll likely be given another chance to convert their holdings to cash or into another fund later this summer.

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"Although the suspension remains in place, we expect the London Life Real Estate Fund will be in a position to allow us to process a second payment in fall 2010 to unit holders who submit a request," the company said.

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