Performance fees will change, study warns

The latest study by INREV, the European body for unlisted funds, suggests fees are more likely to be charged on realised returns, rather than unrealised returns based on valuations

The traditional way funds charge performance fees looks likely to be challenged with fees increasingly based on realised, rather than unrealised returns, a survey by INREV, the European Association for Investors in Non-listed Real Estate Funds, has found.

Respondents to the 2009 INREV management fees and terms study predicted fees are more likely to be charged on realised returns rather than unrealised returns based on valuations.

The survey found 82 percent of funds applied a performance fee structure, either periodically, at the fund’s termination or both. However, INREV added there was little evidence yet that market conditions impacted had fee levels and structures for non-listed property funds. Just 22 existing funds out of 268 questioned had altered their fee terms in 2009.

For fund management fees, the highest fee charged on gross asset value was levied by funds launched in 2007 with an average rate of 0.69 percent. That is in line with the property market reaching its peak across Europe, INREV.

For funds launched in 2008 and 2009, average management fees for value-added funds fell to 0.56 percent of gross asset value compared to 0.8 percent in 2007. INREV noted this was based on a small sample, adding there was no clear trend for core funds.

INREV said: “The impact of fee terms and levels are difficult to gauge in a market which has seen a limited number of fund launches, but interviews with investors and funds managers reported that discussions over fees were common at this time. Changes to fee terms and levels are expected to feed through to upcoming fund launches.”

Investors are now less prepared to accept fund management fees based on gross assert value, which many fear encouraged the use of higher levels of gearing and a quicker pace of investment in some funds. Instead, fees based on net asset value or committed capital are increasingly being favoured.