Investors appear unconvinced about the merits of managers selling stakes in their business to third parties – 45 percent believe it makes managers less attractive investment partners and only 12 percent say it makes managers more attractive. A significant portion remains uncertain.
However, the trend of managers selling stakes is set to continue, says Alfredo Lobo, partner at real estate advisory firm Hodes Weill. “The increasing volume of stake sales from real estate managers is a reflection of the maturing industry as, for example, business founders seeking a way to realize value while ensuring business continuity and succession planning.”
Kiran Patel, chief investment officer at Savills Investment Management, adds: “A manager selling a stake can be positive or negative for its investors. Above all, managers need to be fair and equitable across their investor group, and be conscious of their fiduciary responsibility.”
A significant minority, nearly one-third, of investors in private real estate are open to increasing the number of manager relationships they maintain. However, 37 percent want to maintain the same number of relationships and 11 percent would like to decrease that number.
Patel says: “I think to date there has been a tendency to stick with current managers – that is certainly the case for the investors we’ve been talking to. Naturally, there will be some churn. Size is also a consideration; the infrastructure a real estate fund manager needs, especially if it operates cross-border, militates in favor of fewer, larger managers.”
Lobo also says his experience suggests a preference for a smaller number of manager relationships overall. “We consistently find that investors want to do more with fewer managers and concentrate relationships wherever possible. The exception would be when investing in niche sectors – for example, data centers, where they need to look further afield to find expertise.”
In line with survey respondents’ willingness to form new manager relationships, the survey finds a significant minority – 38 percent – of investors in private real estate are prepared to opportunistically invest in first-time funds while a further 9 percent do not do so at present but plan to in the future. However, half of the respondents report they have no plans to back first-time funds. Lobo’s comments suggest investors might also be more likely to back a first-time fund if it gained them access to a niche sector.
Investors show a reasonable degree of confidence in their real estate managers’ ability to structure deals sensibly enough to withstand a downturn, with 48 percent confident that their private real estate investments are downturn-resistant.
Patel believes managers have learned lessons from the last cyclical downturn: “I think there is a prudence in debt usage, because debt usage brings volatility – no one is going overboard as they did in 2005-07.”
He also believes managers have become savvier in structuring their vehicles. “There is much more flexibility being written into structures – for example, open-ended funds have much stronger clauses to manage inflows and outflows, giving managers and investors more flexibility to deal with volatility.”
Track record tops diligence concerns
Investors are broadly focusing on the usual areas in terms of due diligence. However, observers expect the relative importance of ESG considerations will grow over time. More than 75 percent of investors consider a manager’s performance track record, team size and investment capacity, and terms and fees to be major factors in their diligence, with track record a major part of the due diligence process for 93 percent of respondents. However, only 31 percent consider environmental, social and governance issues to be matters of major importance.
Nevertheless, Lobo says: “Sustainability matters are increasingly important in investors’ due diligence, particularly for those investors that hail from Europe and Australia, which have embraced ESG. Climate risk is becoming particularly acute for real estate investments, so managers need to be taking a lead on these matters.”