Update: As of 07/01/20, Fundrise resumed normal operations of its redemption programs.
Fundrise is very worried about the economic implications of COVID-19, as are many other American individuals and businesses. The company, which is best known for its eREIT investments, recently issued an update to investors amid the coronavirus pandemic.
Fundrise's management team believes we are still in the upward slope of the coronavirus curve and that the general panic surrounding the pandemic will peak somewhere between two and six weeks from now. On the economic front, the company feels that if the pandemic takes a long time to play out, the government stimulus efforts might not be enough to ease the pain and that "there is a legitimate possibility that this pandemic unleashes the greatest threat to our economic prosperity since the Great Depression."
Fundrise is suspending redemptions
Along with its update, Fundrise announced that it is suspending redemptions across its mature eREITs and eFunds.
To understand why Fundrise made this move, it's important to realize that eREITs don't work in the same way as publicly traded REITs. When you sell shares of a publicly traded REIT, someone else buys the shares. The company doesn't have to pay you for them.
On the other hand, when Fundrise investors redeem their shares, the company needs to pay investors for them directly. This means that Fundrise would have to dip into its existing cash reserves, which provide a valuable cushion to protect against poorly performing assets during these uncertain times. Or, the company could be forced to sell assets into a weak market in order to raise capital for these redemptions.
In a nutshell, neither is an attractive option for the company. It's simply not desirable to sell assets for less than they're truly worth, and keeping a capital cushion is a main reason the company feels its assets will come out of the tough times in good shape.
Similarly, the company isn't accepting new investments into its mature eREITs and eFunds. However, Fundrise does have new investment products that are accepting new investment dollars, and the company claims that these will invest in "strategies tailored specifically for the COVID-19 world in which we live in today."
Should Fundrise investors worry?
With an understandably gloomy outlook, a suspension on redemptions and new investments, and the fact that the publicly traded REIT space has been one of the worst-performing parts of the stock market in the coronavirus crash, it's only natural to wonder whether Fundrise's eREIT and eFund investors should be worried about their assets.
However, the company assured investors that its investment products are specifically built to withstand any type of downturn the economy experiences. While the company acknowledges that it isn't immune from the effects of the downturn, Fundrise's management says, "The portfolio is as well positioned to be able to sustain a severe economic downturn as any other investment asset with which we are familiar."
Fundrise has recently been conducting stress tests of its assets, assuming such extreme conditions as 30% economic vacancy rates in stabilized multifamily properties, and the company is confident that nearly all of its portfolio would be able to survive with little or no principal risk.
Will other non-listed REITs follow suit?
It certainly wouldn't be surprising for other private and/or non-listed REITs to pump the brakes on investor redemptions during these uncertain times. It's worth reminding real estate investors that private and non-listed REITs aren't intended to be completely liquid assets in the first place, and to facilitate a large volume of redemptions would be counterproductive to their investment goals.