Last month, the European Association for Non-Listed Real Estate Vehicles (INREV) took another step forward in its ongoing campaign to improve transparency in the €400 billion private real estate funds industry in Europe.
On September 18, amid the modern opulence of the Ritz-Carlton on Berlin's Potsdamer Platz, the trade body launched a new methodology for the calculation of net asset values for the industry, as well as guidelines on the disclosure of fee structures for private institutional property funds.
Both are to be welcomed as initiatives aimed at improving transparency in the sector.
The more controversial of the two measures (and the one that got tongues wagging most in Berlin) are the guidelines on fee structures. The guidelines ask fund managers to produce ratios and metrics that allow investors the chance to compare fees and other costs associated with running real estate funds. Called the Total Expense Ratio, or “TER,” it expresses annual operating costs borne by a fund over one year as a proportion of average fund assets. The TER is designed to capture fund-level expenses as well as other property-specific costs.
At the heart of all this is a laudable concept: Unlisted real estate in Europe, into which billions of Euros and dollars have been poured in recent years, should be as transparent as possible. for too long, investors have been asked to make investments in a fund on limited information provided. Sometimes this consists of simply the annual asset management fee. Investors have rightly wanted to know more, such as potential future costs.
“The great achievement of the INREV fee metrics guidelines is they establish a basis for everyone to use the same methodology for the first time,” Markus Koenigstein, head of real estate at Germany's R+V Insurance Group and member of the INREV management board, said in the press release published at the event. “This is a big step forward in the evolution of the non-listed real estate funds industry.”
Indeed, it is. The association, which has been going for four-and-a-half years, has already made big inroads into standardizing the industry with a series of initiatives such as general partner reporting guidelines, a corporate governance framework, a due diligence protocol and moves to create a standard private placement memorandum.
In trying to get fund sponsors to provide ratios and metrics enabling institutional investors to compare fees and other costs for non-listed real estate funds it is borrowing from the US mutual funds industry, and to a lesser extent from private equity where management fees have been used almost as a top up to carry reflecting the ever increasing size of funds.
At the heart of all this is a laudable concept: Unlisted real estate in Europe, into which billions of Euros and dollars have been poured in recent years, should be as transparent as possible. For too long, some feel, investors have been asked to make investments in a fund on limited information provided. Sometimes this consists of simply the annual asset management fee. Investors have rightly wanted to know more, such as potential future costs.
However, this is a difficult area for INREV to get into and one in which some fund managers will have legitimate reservations about. Just one area of difficulty, for example, is that costs can be incurred in the TER that are to do with having more tax efficient structures such as a Luxembourg-based vehicle.
One fund advisor said to Private Equity Real Estate: “Some costs are incurred in order to have a more tax efficient structure and therefore they actually save money overall, yet, in the eyes of the investor, the fund manager could be seen more negatively than another fund manager.”
The apprehension (or, some might say, queasiness) is being felt around the industry. “The TER is a very positive thing, but the danger is in applying it blindly. It may be used as a stick to beat down costs,” another market participant added.
Clearly, using the guideline to simply beat down costs is not the point of the guideline, nor should it be. What matters in a contract entered into between two consenting adults is the return the GP can generate rather than cost. As long as investors are investing with their eyes wide open and are happy with the return, they shouldn't get too bogged down with what it costs to manage the fund.
Overall, INREV is doing the industry a great service by taking transparency to new levels. Eventually, the questions being asked of managers can only lead to greater transparency. That should not be a bad thing.
GAGFAH weak performer for CalSTRS
GAGFAH, the public German residential investment company operated by US firm Fortress Investment Group, has emerged as the worst performing international “tactical” investment for the California State Teachers' Retirement System (CalSTRS). According to its First Quarter 2007 Real Estate Report, published in early September, total weighted returns net of fees were minus 14.2 percent as at March 31. Calstrs invested $100 million in GAGFAH in October 2006. Shares in the company, which operates almost 170,000 residential units in Germany, have fallen from highs of €24.55 last year to €13 a share on September 18. London-based fund Moorfield Real Estate in which CalSTRS invested $30 million in August 2005 produced the best quarterly result for the investor at 36.9 percent.
INREV: opportunistic funds performing well
Value-added and opportunistic vehicles have outperformed the direct property market, according to the latest INREV figures. In the last five years, the INREV Institutional Vehicles Index has produced an average five-year annual return of 13.9 percent, compared to 9 percent for the Investment Property Databank's (IPD) pan-European Index, which tracks the market's performance at the direct property level. “The increasing number of higher-risk strategy value-added and opportunity funds that have joined the INREV Index in the last few years reflects the underlying trend in the European non-listed real estate funds market and means their influence on industry-wide performance is growing,” INREV analyst Casper Hesp said.
BlackRock investing in UK farmland
BlackRock, the US fund manager, is to launch a £100 million, London-based hedge fund that will invest in UK farmland, as well as futures in wheat and other commodities, in the face of rising food prices. The launch comes at a time of increasing appetite for the “soft commodities” market, according to a report in The Sunday Times newspaper. Investors are beginning to be offered opportunities in the sector. One European real estate fund of funds manager told PERE that an Eastern Europe-focused operating partner is buying cheap farm land in order to benefit from the spike in commodities prices, while another group is investing in a cattle fund in Argentina.
Swiss Hawk launches two real estate funds
Swiss Hawk, the investment bank based in Zug, Switzerland, is partnering with Deutsche European Real Estate in two real estate investment funds to be listed on the Frankfurt Stock Exchange before the end of the year. The Hanseatic and Baltic Fund will target commercial and residential real estate in the Hanseatic and Baltic regions, while the Deutsche Residential Fund will invest in residential real estate throughout Germany. Swiss Hawk has agreed to provide capital and arrange for the new funds to be listed on the Frankfurt Market. It will also help raise additional capital for the two funds from institutional and private equity investors.