The so-called ‘denominator’ effect as well as more general economic turbulence is having a significant effect on the appetite among investors for non-listed real estate funds, according to a survey.
INREV, the European Association for Investors in Non-listed Real Estate Vehicles, has found that more than 70 percent of institutional investors are raising their allocations to other asset classes because the value of their real estate holdings has risen as a proportion of their total assets because of a slump in share prices and bonds.
On the other hand, the association’s Investor Survey finds that in the medium term, more than 70 percent plan to up their allocation to real estate mainly through non-listed vehicles.
Of particular interest to opportunity funds, however, is the finding that limited partners are willing to invest relatively more in higher risk vehicles. As well as greater interest in opportunity funds, respondents showed appetite for those investing in mezzanine financing and real estate debt, as well as in markets outside the EU. South America in particular was mentioned, as well as Asia, as areas where investors want to increase their allocations in the short term.
“It is interesting to note that despite the more uncertain and volatile market environment, with the greater difficulty in raising financing, investors are considering acquiring debt-related products and are also increasing their exposure to the higher end of the risk spectrum, by investing relatively more in opportunistic fund strategies,” said Mahdi Mokrane, head of research and strategy at real estate investment manager AEW Europe in a statement. “This contrasts somewhat with INREV’s Investment Intentions Survey published at the beginning of this year, in which investors intended increasing their exposure to value-added strategies.”
INREV presented its findings in Paris at an investor forum this week. Twenty eight institutional investors and 16 fund of funds managers responded to the survey.
Of the overall findings, Marie-Claude Gleize, director for non-listed real estate funds at French investor Caisse des Dépôts, said: “I think this indicates that the long-term trend of increasing institutional allocations to real estate is still intact despite the impact of the credit crunch, although the survey also shows evidence of technical changes in investment strategy in the short term in the current difficult market.”
INREV said the denominator effect was not yet impacting on non-listed real estate funds for over seventy percent of the investor group surveyed, but 25 percent said they were considering reducing their fund holdings. Of those that were considering cutting their exposure to unlisted funds, 44 percent plan to do this by repatriating equity upon termination of a fund, while 31 percent were considering sales of their interests through the secondaries market.
The survey is also of interest to those raising funds at the moment because it confirms that it is taking longer to get commitments. Almost 50 percent of investors said that the time taken to make a decision to invest in a non-listed real estate fund had increased compared with a year ago. The main reason for the extended decision-making was a longer due diligence process.
The credit crisis also appears to have tilted the balance of power in negotiations over fees and terms in favour of investors and fund of funds managers, relative to fund managers. Some 60 percent of investors and 73 percent of fund of funds managers said their negotiating positions for fees had improved, while 50 percent of investors and 63 percent of fund of funds managers said the same for terms. No respondent said their negotiating position had deteriorated.
Half of the fund of funds managers polled said they now required more detailed reporting from the fund managers they have invested with, compared with just 29 percent of investors. INREV said this may be partly due to the fact that fund of funds managers generally have shorter investment horizons than institutional investors and need to put the capital they receive to work as quickly as possible to underpin future performance.
To a large extent this demand for increased reporting may be relate to valuations. “With the volume of real estate transactions declining significantly in Europe, there is a shortage of pricing reference points in the market. In this environment, it is extremely important that fund managers and investors spend time on communication, so there is a full understanding of the performance of funds,” said Christian Delaire, global head of fund management at AXA Real Estate Investment Managers.