Friday Letter Cleaning up

Entrepreneurs do not necessarily make the best communicators. Richard Branson, for example, the famous anti-establishment British billionaire behind the Virgin brand, struggles with the occasional stutter. He also keeps the success or failure of his numerous businesses hidden from view, often registering his accounts offshore. 

Like Branson, property moguls do not relish much scrutiny—Alan Sugar or Donald Trump aside—preferring instead to share details of their ventures only with the closest of advisors or trusted long-term investors.

But there is a significant segment of the property markets where greater transparency is perhaps required: unlisted real estate funds, which represent perhaps the last bastion of opaqueness in the property industry. Most fund managers contend that is a necessity, one that not only allows them to move quickly and discreetly, but also to keep their proprietary investment strategies to themselves. Increasingly, however, many of their investors disagree.

Last week the issue was highlighted by the European Association for Investors in Non-Listed Real Estate Vehicles (INREV), which readily concedes that there has been a lack of coordination of corporate governance principles in the industry. For this reason, the organization produced the Seven Principles of Corporate Governance and accompanying guidelines, which, for the first time, provide a unified approach to the issue.

The guidelines contain basic stuff. For example, managers are reminded that investors should have enough information to be able to assess performance targets and understand fees. Nevertheless, the guidelines are to be welcomed. After all, lack of transparency is a key factor limiting institutional investment in non-listed funds. According to INREV’s Investment Intentions Survey 2007, also released last week, investors rank lack of transparency as the number one reason for not investing in private real estate vehicles.

Last year, the same survey found that 100 percent of respondents planned to increase their allocations to non-listed real estate funds. This year, that figure dropped to 70 percent. In contrast, more investors are saying they intend to now invest through listed funds, probably reflecting the growing in interest in REITS sweeping Europe, as well as the increasing availability of fund of fund securities, suggests INREV. It could also be that some investors have enjoyed good returns from unlisted funds in recent years and are cashing out.

Whatever the reason, this will be a key year for the asset class, particularly when it comes to corporate governance. Private real estate fund should remain entrepreneurial, but they might need to become a little less private.

PS: The polls for The 2006 Global PERE Awards are open until January 31st. Cast your vote for the industry’s leading personality of 2006, the year’s best exit and many other categories. To vote, go to