How Open-Ended Funds Manage Liquidity in an Illiquid Asset Class

You want real estate’s long-term stability but not its illiquidity. Can you have both?

It’s a classic trade-off. Real estate offers compounding income, inflation protection and long-term value but it also locks up capital. In response, open-ended real estate funds have surged in popularity. They promise access to property markets with flexible entry and regular redemption windows. For many investors, this appears to offer the best of both worlds.

But surface liquidity can be misleading. When conditions shift – due to rising rates, valuation swings or geopolitical risk – redemptions don’t just test the portfolio. They test the structure. The ability to retrieve capital doesn’t depend on asset quality alone. It depends on whether the fund’s design supports liquidity. That’s where structural liquidity in real estate becomes the real differentiator.

Understanding the Open-Ended Structure

Open-ended real estate funds are perpetual vehicles. They allow investors to subscribe and redeem capital at fixed intervals – typically quarterly or semi-annually. Unlike closed-ended funds, which raise capital once and return it after a defined term, open-ended models rely on continuous flows of capital in and out.

This ongoing structure offers flexibility, but it also introduces pressure. Liquidity must be available even when the underlying properties are not easily sold. That’s the crux: real estate fund liquidity management is not about speed. It’s about ensuring that liquidity access is engineered into the fund itself, well before redemptions begin.

Why Real Estate Can’t Move Quickly

Real estate is inherently slow-moving. Selling an asset involves marketing, negotiation, due diligence and legal transfer – often over several months. Market cycles, regulatory friction and financing constraints amplify delays. According to MSCI, global institutional property turnover rarely exceeds 5% annually.

This illiquidity becomes problematic when investors expect frequent access to capital. Without alignment between redemption terms and asset behavior, illiquid asset fund strategies become fragile. Liquidity mismatches erode investor trust, not because assets fail, but because redemption promises were unrealistic.

What Goes Wrong Without Structure

Relying on market conditions to meet redemptions is a high-risk approach. During normal times, redemptions may be routine. But in periods of volatility – such as interest rate hikes, uncertain valuations or global shocks – buyers hesitate. Liquidity tightens and redemptions spike.

Without strong real estate investment fund redemption policies, managers may sell prime assets at discounts. This hurts long-term performance and disadvantages remaining investors. In 2020, several UK property funds suspended redemptions after valuation challenges and redemption surges left them illiquid. The lesson: market liquidity is volatile. Structure is the only constant.

Structural Liquidity, Not Market Liquidity

Open-ended real estate funds must embed liquidity into their design, not rely on external buyers. Structural liquidity in real estate refers to built-in mechanisms that regulate how and when capital moves. These tools allow the fund to manage redemptions predictably, even when market exits are not viable.

Well-designed structures don’t react to redemption pressure. They anticipate it. The goal is to separate investor flows from asset sales. This protects the portfolio, maintains fairness and builds resilience. Structural liquidity is not a constraint, it’s the foundation of sustainable access in an illiquid environment.

The Architecture of Liquidity Design

Strong real estate fund liquidity management depends on clearly defined controls. Each tool addresses a different aspect of liquidity:

Notice periods: Provide lead time to prepare for redemptions without urgency.
Redemption gates: Cap redemptions per period to prevent fund-wide disruption.
Lock-ups: Restrict redemptions for a fixed term, stabilizing the capital base.
Redemption queues: Prioritize exit requests when demand exceeds available liquidity.
Liquidity sleeves: Reserve a portion of assets in cash or liquid securities to meet smaller outflows.

These features aren’t there to trap capital. They’re designed to align liquidity expectations with asset behavior. When used together, they create a durable framework that withstands pressure and protects long-term investors.

Structure in the Storm

Redemption pressure doesn’t always come in crisis form. Often, it’s a slow build. What separates successful funds from stressed ones is structural readiness. During the COVID-19 crisis, funds with proper safeguards – notice periods, gates and liquidity buffers – continued operating without distress. Others suspended redemptions or sold off assets under pressure.

These mechanisms don’t eliminate liquidity risk. They contain it. Instead of reacting with forced decisions, managers can plan. Investors are protected from dilution. And the fund preserves its ability to generate long-term returns. In turbulent periods, real estate investment fund redemption policies become the difference between resilience and unraveling.

What Investors Should Really Be Asking

Investors evaluating open-ended real estate funds must focus on how liquidity is governed, not just when it’s available. The right questions reveal whether a fund’s promises are built on structure or assumptions.

Here are five key points to guide evaluation:

Scrutinize redemption terms beyond the headline – Go beyond terms like “quarterly liquidity.” Examine gates, lock-ups and notice periods.
Ask how the fund handled prior redemption cycles – Real-world stress events show how structure performs, not just policy documents.
Evaluate how the liquidity promise aligns with the strategy – A mismatch between asset duration and redemption frequency is a warning sign.
Look for transparency in liquidity planning – Strong funds disclose reserve ratios, pending redemptions and liquidity buffers.
Test the manager’s mindset during due diligence – A disciplined manager treats liquidity as a risk to govern, not a feature to promote.

These steps help investors avoid liquidity traps masked as flexibility. Sound governance is visible to those who know what to look for.

Countering the Common Critique

Skeptics argue that no structure can prevent redemptions in a crisis. So why design for it at all? The answer lies in controlling outcomes. Perfect liquidity is impossible but structure shifts the odds. It creates time, enforces fairness and maintains trust.

A fund with strong policies may still face outflows but it won’t spiral. It won’t panic sell. And it won’t erode the value of long-term investor capital. Structural liquidity in real estate isn’t about eliminating risk. It’s about owning it before the market does.

Conclusion – Reframing the Investor’s Choice

At the start, we asked whether it’s possible to gain real estate’s long-term benefits without being trapped by its illiquidity. The answer is yes, but only if liquidity is built through structure, not assumed from markets.

Open-ended real estate funds can deliver flexible, scalable access when designed intentionally. That means aligning redemption policies, pacing mechanisms and buffers with the asset class’s natural behavior. When liquidity is overpromised, confidence collapses. When it’s engineered with discipline, everyone benefits, even in volatility.

Investors don’t need more liquidity. They need better alignment. Before committing capital, look past access and examine design. Ask hard questions. Study past behavior. And choose managers who treat real estate fund liquidity management not as a convenience but as a cornerstone. Liquidity is not a feature. It’s a responsibility. Funds that treat it that way are the ones worth backing.

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