The European Central Bank (ECB) warns of funds that invest in commercial real estate, considering it a threat to financial stability after it has grown significantly over the past decade, Invest-Gate reports.

ECB, on Monday, said in its macroprudential bulletin that the net asset value of real estate investment funds had grown more than triple, reaching $1.1 tr in the past ten years and has increased their interdependence with real estate markets.

ECB also warns of the inconsistency because investors can withdraw while the funds are highly illiquid. It can be valid to resonate in the appropriate financial system.

The ECB notes that instability in this area could have structural ramifications for commercial real estate, affecting the stability of the broader financial system and the real economy.

The researchers pointed to the Blackstone Real Estate Income Trust (BREIT) as a recent example of a fund that had to limit redemptions as investors withdrew money. They added that concerns about the real estate market could increase withdrawals.

Commercial real estate has been hit hard during the pandemic, which has fueled work-from-home and e-commerce policies. An uncertain economic outlook and rapid interest rate increases to combat inflation pose additional risks.

According to the prospectus, the rules should be developed to better assist funds in managing sudden surges in liquidity demands and bear redemption costs that can arise during market stress. It is noteworthy that this could include a slower redemption rate and longer investor notices.