Great-West Real Estate Fund freeze continues

By Ian Bolduc | November 26 2009 07:06PM

Great-West Lifeco (GWL) still doesn't know when it will be able to lift the temporary suspension of withdrawals that is in effect on its Great-West and Canada Life real estate fund. For the moment, portfolio managers are busy increasing liquidity and preserving unit values.

In a conference call on Oct. 15, two executives, Alf Goodall, Vice President of marketing for individual retirement and investments, and Dave Rose, Vice President of portfolio management, GWL Realty Advisors updated financial advisors about the fund.

In order to lift the suspension and allow withdrawals from the fund, the company must increase its cash position. To do this, it must find investors who want to acquire some of the properties it holds.

"We select the properties based on what we think will sell. The price is important. It needs to be a property that will be of some interest to other investors and at the same time, we keep our eyes on the diversification quality and integrity of the portfolio itself," said Mr. Rose.

He gives, as an example, the fact that the fund could probably sell several of its residential properties very quickly and obtain a good price for them, but doing so would undermine the fund's strategy. Mr. Rose adds that several properties are subject to potential sales. A number of them have come onto the market, and some are already under contract, while others are still in negotiation.

"I'm hesitant to give the number of transactions that are underway because I'm not sure which of those will close or not. But we could say that there is hundreds of millions of real estate in play," he explains.

The temporary suspension serves two purposes, namely to make sure that the fund will retain its value for investors who want to keep their money invested, and to increase liquidity for those who want to withdraw. "We ask people to be patient with that process and hopefully, as time goes by, we're going to be in a much stronger position. As you can clearly see, cash is building. And once we get to an appropriate level, we'll allow redemptions," say the executives.

As of Sept. 30, 2009, the fund held $123 million in cash, which represented 4.1% of its net equity. At the end of 2008, a little after the suspension had been put in place, the fund only held $13 million in cash, which was 0.44%. By the end of spring, Mr. Rose says he would like to see the cash balance increased to 15% or 20% of the fund's net equity.

For the moment, the fund owns about 165 buildings. More than half of the portfolio is made up of offices. The rest is mostly made up of industrial, residential, and retail properties. The real estate is located primarily in Ontario, Alberta, and British Columbia.

There are only two "true" real estate funds in Canada, which are funds that invest directly in properties and not in mortgages. Besides Great-West, Investors Group also offers a Real Property Fund, but this is a mutual fund, and not a segregated fund.

The Investors Group real estate fund has not placed a temporary suspension on withdrawals. According to Mr. Goodall and Mr. Rose, this fund differs from the one offered by Great-West.

"The Investors Group fund is very different. It has always been maintained more as half cash, and while that allows them to have more liquidity, it has caused their fund to under perform ours over time because it is sort of half money market fund and half real property fund," they explained. As well, they noted that there are still several real estate funds in Europe that are under a temporary suspension. According to the latest report from Investors Group, cash and short term investments made up 22.2% of their fund's portfolio.

Great-West is still honouring regular scheduled payments for investors who hold the fund inside of their RRIF. Mr. Goodall explains that these payments are not having any negative effect on the fund's liquidity. He adds that Great-West is buying units from individuals who need to receive regular payments, and that the payments are funded from the company's own financial resources, and not out of the fund. This way, he says that the fund's cash position is not affected.

"We want to provide this type of (conference) call on a fairly regular basis, probably every six to eight weeks," commented Mr. Goodall. Therefore, the next one should take place before mid-December. He adds that the company wants to make sure it is providing enough information because people are concerned by the current situation. However, Mr. Goodall says that he does not want to overwhelm people with information, especially if there is nothing new to report. To this, one financial advisor replied that he did not think it is possible to over-communicate. "The more info I have that I can relay to clients and anybody associated with the fund, it gives us credibility, because we lost a lot in the last year," he said.

Another advisor who participated in the conference call wanted to know when the company would be sending information to clients directly by mail to keep them up to date. "When are you going to send something to clients directly to get them the status of the situation with this fund?" he asked. "The last communication to clients who have this fund was sent with their statement at the end of June."

"Certainly before year-end," replied Mr. Goodall. "I think you're going to likely see something towards the end of November or early December." He explained that the communication is being drafted and that it would give clients a good idea of the fund's position. In addition, the firm responsible for managing the fund, GWL Realty Advisors, posts a monthly update on its web site at