In last month’s column, we wrote about US-focused real estate fund managers seeking to diversify their investor bases geographically as their traditional sources of capital have dried up. In broadening their marketing outreach, however, those managers may find themselves dealing with groups of investors that use a different vocabulary from one another. Consequently, the firms are faced with a potentially difficult task in their fundraising efforts – trying to get all of their prospective limited partners on the same page.
Australian investment manager QIC is a new US-focused fund manager, having recently launched its first US real estate fund, QIC US Shopping Center Fund. But it, too, may be in a similar scenario. With QIC US Shopping Center Fund, QIC is targeting three major markets for investors. It expects that a significant portion of the capital will come from Australian institutional investors—including many of QIC’s existing clients that are in the country's top 20 pension funds. The investment manager anticipates that the remainder of the capital for the fund would come from limited partners in Asia and, naturally, the US, given that it is the geographic focus for the vehicle.
Focusing on the groups of institutional investors from Australia and the US, there lies a potential marketing challenge, as the two groups can have divergent perspectives on various aspects of real estate investment.
Let's start with risk appetite. QIC is calling the fund a core-plus vehicle, largely because of the focus on adding value to the portfolio, but also because the fund will have leverage levels in the 40 percent to 50 percent range. These broad parameters are in line with what the majority of US investors would view as a core-plus fund. Australian investors, however, tend to consider the fund's strategy as closer to a core product, based largely on their acceptance of value-add and redevelopment projects, including ground-up development, undertaken on high-quality shopping center portfolios.
Through experience, Australians tend to have a higher tolerance for active management than Americans, on the condition that projects are undertaken within agreed tolerance levels, both on an asset level and on a portfolio basis. This includes having tenancy pre-commitments in place before significant development activity is undertaken. However, Australians are somewhat less accustomed to the fund’s proposed leverage levels, with investors typically seeking lower leverage over the longer term than what is initially being proposed by the fund.
Additionally, the liquidity provisions for investments in the US are not necessarily the same as those in Australia. However, following extensive market sounding, QIC is attempting to enhance liquidity in its new US fund by focusing on raising capital from a variety of regions and providing multiple liquidity options to investors in the fund.
The two groups also have differing views on real estate terms, such as the definition of a retail center. The US has 10 different types of shopping centers, according to the International Council of Shopping Centers, ranging from super-regional malls to strip malls to power centers to factory outlet centers. The Land Down Under, however, does not have the same level of depth in definition.
QIC is just one example of a fund manager that will likely need to tailor its message to the particular institution it is addressing. The manager also may need to reeducate some of its investors on the differences between investing in retail real estate in the US versus in its home market. It is important to note such a scenario is more likely to happen with investors that are new to the market in which they are investing. One would expect that more experienced foreign investors would already be familiar with the differences between the real estate terminology used by themselves and that of their American counterparts, and therefore should have less trouble getting the message.
It is understandable for one to think that geography does not really play much of a role in all of this, especially because different types of investors from the same geography may think about real estate differently. But geography does in fact have an impact, because generally speaking, the vocabulary that investors use is often determined by the people they associate with, which typically are people from the same country. To ensure it has a successful fundraise, the fund sponsor needs to make sure that nothing gets lost in translation.