For real estate strategies, such alignment boils down to restricting withdrawal rights in a way that prevents the fund from having to generate liquidity by selling properties prematurely or at discounts that do not reflect their long-term value. Such liquidity stress is a concern for remaining investors, as forced disposals, valuation adjustments and transaction costs may disproportionately affect the investors who stay in the fund.

While EU AIFMs previously had broad discretion in designing measures to mitigate liquidity stress, a new framework is being introduced under AIFMD II. EU AIFMs must ensure that open-ended funds incorporate liquidity management tools (LMTs) in the fund documentation, considering the features of the asset class, investor base and expected redemption profile.

In the context of evergreen real estate funds, the qualification of a fund as open- or closed-ended is not clear-cut. These products will always offer periodic liquidity in some form, since permanently locking in investors is neither commercially viable nor legally permissible. When considering the purpose of AIFMD II and the economic features of real estate strategies, such funds should only be classified as open-ended if the withdrawal rights are of the type that can cause liquidity stress in the fund. This economic perspective is crucial as relying solely on the over-a-decade-old existing EU definition of open-ended funds does not account for the evolution of real estate evergreen products with specific liquidity mechanics.

In a model where the fund must only meet redemption requests following the disposal or refinancing of real estate assets in their natural order, and where the manager retains discretion on timing, liquidity stress should generally not occur and should often qualify as closed-ended. Likewise, in a vintage model where investors are rolled into a new real estate investment, unless they opt out the mechanics should qualify as closed- ended. 

Certain EU evergreen real estate funds considered as closed-ended from a regulatory perspective are marketed as open-ended from a commercial/marketing perspective. This typically occurs where the Luxembourg real estate fund forms part of a broader international or US-led platform that uses “open-ended” terminology in a commercial sense, which differs from the EU regulatory definition of open-ended funds. In these circumstances, suitable disclosures must be made in accordance with EU requirements to ensure that investors are fully aware of the restricted nature of withdrawal rights, the role of valuation periods and the practical limits of liquidity in a real estate portfolio.