EDITOR'S LETTER: Stick to your knitting

For a hypothetical €500 million core strategy separate account, he would warn the investor the lag time between its commitment and draw-down would be around 12 months. It would have been six months as recently as one year ago, such is the intense competition for assets these days.

Such a lag raises the question of what should happen to that hypothetical €500 million as it waits to be called. PERE’s sister publication Private Equity International heard how some managers were being asked by investors for their capital to be placed in liquid investments as it waits to be summoned.

I brought up the notion of private real estate managers offering a similar solution, which could see investors earn while they wait for their capital to be deployed.

“Liquidity brings with it volatility,” the manager replied. To him, introducing such additional risk when there is so little margin for error anyway could be as harmful as helpful for investors and, as such, was not worth the endeavor.

But the very fact the notion has arisen speaks to the difficulty institutional money has in meeting liabilities right now. According to BNP Paribas Real Estate, prime office yields in Europe are historically low: Paris prime has reached 3.15 percent; Munich and Geneva 3.2 percent; even London trades at 3.5 percent.

The scope for error buying at these prices is already perilous and yet there remains a reluctance to buy off-piste. Margins between prime and secondary assets are widely considered too close to warrant the extra risks inherent in buying them and so that leaves an increasingly crowded middle ground – core-plus, develop-core, all-but-core, you get the gist. Acceptable versus unacceptable risk is one of PERE’s evergreen topics. But, like we do, private real estate professionals should keep the conversation to what they know most about – private real estate. Incorporating non-property stop-gap solutions because market traffic has become intense is reckless.