The past 20 years have seen, in Jack Foster’s words, the “globalisation of the last asset class”.
As the managing director of Franklin Templeton Real Estate Advisors (FTREA) sits in his firm’s conference room on New York’s Fifth Avenue, Foster is reflective of the journey he – and the real estate asset class – has made over the past two decades.
Real estate, as the private equity real estate industry knows only too well, is an extremely local business. However since the 1990s it has also undergone a dramatic shift in strategic focus to a much more global perspective.
It is a shift that Foster has witnessed during his 21 years with Franklin Templeton Investments, the management firm which rebranded its real estate group as a separate investment platform in 2007. For Foster, real estate has merely followed the lead of other asset classes, from equities to alternatives such as private equity.
Encompassing the world
Real estate is, in his words, the last asset class to encompass the world. “A major part of my career is actually building, watching and being a part of the globalisation of the last asset class,” Foster says. “Real estate is arguably one of the most domestic of asset classes. It was the last asset class that investors would move overseas into. They could move into bonds, they could move into stocks – they were comfortable with those, but they were much slower to move with real estate.”
Franklin Templeton was launched in 1947 in New York by Rupert H. Johnson Sr., and focused much of its early attention on mutual funds and fixed income investments. However its decision to branch out into global real estate investing in 1984 placed it well ahead of many of its contemporaries.
By 1987 Foster had joined the firm’s real estate team, which in its earliest days managed mainly separate accounts. The other managing members of FTREA include managing directors Glenn Uren, who joined in 1996; Raymond Jacobs, who joined in 1999; and Marc Weidner, who came aboard in 2002. All four of the managers have an equal say in the business.
The group formally shifted to a fund of funds strategy in the mid-1990s, after which it moved into a higher return strategy in the value-add and opportunistic space. It continued to build an international client base, providing both separate account opportunities, as well as formal fund of funds.
But it was the work on its first account, a major supranational fund, which reinforced FTREA’s global view of real estate, Foster says. “We were picking and selecting real estate funds for the supranational around the world,” he said. “When I joined the firm in 1987 I was investing in Germany, Switzerland, Australia, the US and the UK. So out of the gate we had a very global exposure.”
Foster adds that his group was investing internationally before most people had even given consideration to moving outside their
domestic markets. “That immediately was a global approach,” he said. “Out of the gate we had a very global exposure because the supranational is tax exempt in most of those countries. We were looking at and investing in funds globally and we very
quickly had over 20 different fund investments around the world.”
One of the critical factors for global real estate investing was also the habit of hiring people with the cultural background of the different markets targeted. The group’s first two hires were non-American, and it only brought on its first American members in the last year or two. Today, the team is comprised of 20 individuals speaking a total of 17 languages spread across Asia, Europe and the US.
One of FTREA's first funds was a global commingled fund of funds, Franklin International Real Estate Fund, which closed on $92 million in 2003. Today the firm has four real estate vehicles, having raised more than $1 billion in capital and with assets under management of $5 billion.
Even from its earliest days, Foster says, he saw great opportunity in the real estate multi-manager business, having watched the emergence of funds of private equity funds and the emergence of funds of hedge funds. As such it was “natural” that the real estate funds of funds structure would gain the same kind of momentum and support.
For Foster what has really driven the funds of funds opportunity has been the explosion in the number of real estate funds that are available globally.
“We look at the real estate funds in terms of how many funds are in the market – closed-ended, value-added, opportunistic funds – every 18 months or so, and the deal flow has tripled or quadrupled in the last five years,” says Foster. “We've moved from 100 to 150 funds five to seven years ago, to today where almost 500 funds are available every 18 months.”
The implication of such growth in fund numbers is that it has become harder for investors to discern between the good, the bad and mediocre. Moreover, says Foster, there is no ideal performance benchmark that exists in the private equity real estate space as compared to the traditional private equity space.
Such considerations, therefore, have made relationships vital for a fund of funds manager. “In our view, whether it's a GP that's having trouble or is very successful, the key has always been to maintain a very positive relationship with those GPs whether they're under stress or just having a great time,” says Foster.
And in times of distress, those relationships become even more important, as FTREA attempts to avoid funds that may potentially have problems – even if it means missing out on some of the good funds. “We may not invest in every great fund but the idea is we will avoid funds that have issues,” he said.
Marc Weidner adds that the group's focus has to be on what can go wrong in a fund. “What the Plan B is if Plan A doesn't work has helped us really navigate the challenges in the market,” he says, adding, “We're not buying the dreams of the underlying funds.”
Not only does the fund of funds group target a global investment strategy with investments in emerging markets, but it also targets emerging managers as well.
Europe, Jacobs says, has seen an explosion of fund managers over the last five to seven years. And with increasing numbers of operating partners of larger private equity real estate funds spinning off on their own comes the opportunity to partner with key players.
Asia has also been a keen investment destination for the group for the past 10 years, with FTREA closing its Asia-focused fund of funds vehicle, Franklin Templeton Asian Real Estate Fund, in November 2008 on $383 million.
Of course, emerging markets do present their own risks, concedes Glenn Uren. Real estate is illiquid and investors need a stable rule of law to maintain ownership and clear title. Risk management is therefore critical. Investors need to understand the risks involved in property, whether ownership or the economic risks of the country, that may cause valuations to move up and down.
But assessing risk is just as applicable today in judging investment opportunities in the US as it is in emerging markets. Foster says the distressed opportunities expected to emerge in the US and Western Europe over the coming months could breed some of the greatest “near term” deals for private equity real estate fund managers. However, he is still cautious about jumping in too soon.
“We're investing for the long term,” says Foster, “so we need to make sure that if we can recognize trends in the market, we want to make sure we're in front of the positive trends, not the negative trends.”
AT A GLANCE
Franklin Templeton Real Estate Advisors
|Parent||Franklin Templeton Investments|
|Offces||New York, Frankfurt, Hong Kong, Singapore, Australia|
|Real Estate funds||Franklin International Real Estate (FIRE) Fund, closed on $92 million of commitments in 2003|
|Franklin International Real Estate (FIRE) Fund II, closed on $398 million in 2006|
|Franklin Templeton European Real Estate Fund of Funds, closed on €209 million in 2006|
|Franklin Templeton Asian Real Estate Fund, closed on $383 million in November 2008|
|Management team||Jack Foster, managing director, head of global real estate (New York)|
|Raymond Jacobs, managing director (New York)|
|Glenn Uren, managing director (New York)|
|Marc Weidner, managing director (New York)|