Roman holiday

On a recent Thursday evening in late April, a group of real estate professionals gathered on the terrace of the Musei Capitolini in Rome to sip kir royales, nibble puff pastries and enjoy a remarkable view of the town that Caesar built and Nero burned. Oh, and to talk about the European property markets as well.

The gala dinner for the 2006 INREV (European Association for Investors in Non-listed Real Estate Vehicles) conference may have been the highlight for some attendees. But for others, there was plenty of food for thought during the rest of the program.

Given that the conference was located on the Via Veneto, one of the most expensive shopping boulevards in Rome, it was only appropriate that much of the first day's discussion centered on the high price of European real estate.

In response to a question of whether or not a real estate bubble existed, Aref Lahham, managing director at European private equity real estate firm Orion Capital Managers, probably summed up the overall sentiment best. “I don't know exactly what the definition of a bubble is,” he said, “but at Orion, we feel it's never been pricier.”

His comments echoed that of the day one keynote speaker Giancarlo Aliberti, managing director of Apax Partners, who noted that in mature markets such as Europe and the US, the era of buying assets cheaply is over. Value creation, be it in private equity or real estate, is now the key to generating returns.

But for all the talk about the current state of European real estate, the primary focus of the conference had less to do with competition and more to do with regulation—or the lack thereof—of unlisted real estate vehicles. For the past twelve months, INREV has made a concerted push to develop a set of corporate governance guidelines for private real estate funds. And on day two of the conference, INREV presented its white paper on the topic. The central recommendation of the paper called for investors in unlisted funds to appoint a board of independent officers who would monitor the fund's performance and its adherence to constitutional terms, much like directors in a public company.

But subsequent presentations highlighted a gulf between investors and fund managers on the topic, namely the importance of corporate governance, how extensive it should be and who should pay for it. According to a survey of investors, for example, good governance is only the fifth most important criteria when it comes to selecting a fund, well behind track record, style, target location and target sector. Approximately 60 percent of the investors surveyed believe that no-fault clauses, which allow them to remove the manager, are the most important features of corporate governance provisions; managers obviously take a much different view. And when it comes to who should pay for the additional cost of enforcing stricter governance standards, opinions diverged as well.

Though prominent limited partners such as Dr. Ngee Huat Seek of GIC Real Estate and Alice Connell of TIAA-CREF urged INREV in its efforts, it is clear that much work remains to be done, not the least of which is convincing fund managers that more governance is in their best interests.

Of course, more strides should be made on the issue. Greater oversight of unlisted real estate vehicles will undoubtedly help the asset class develop, bringing more capital and transparency to the market and perhaps even increasing returns to investors—what one of the presenters called “a virtuous circle.” But there is a very fine line between better corporate governance and onerous regulation.

The private real estate markets are not the public stock exchanges—they are called private for a reason. A relative lack of information creates inefficiencies that fleet-footed managers, unburdened by excessive oversight, can exploit to secure outsized returns. For institutional investors to access those types of vehicles, they will have to take some calculated risks, including a more limited role in governance. It would be hard to imagine, for example, that the traditional private equity market would accept the concept of an independent board to monitor its activities. Real estate may be a more transparent asset class, but particularly for opportunistic and value-added vehicles, such a structure seems difficult to swallow and impractical to implement.

More information and regulation is a good thing. But for the most part, sophisticated limited partners in the private real estate markets may have to follow the advice of the investors and merchants of ancient Rome: caveat emptor.

ING launches global fund of funds
Dutch insurance company ING Real Estate Investment Management has formed a global fund of funds line, announcing the new vehicle at last month's INREV conference in Rome. Nick Cooper, who formerly headed up the group's UK fund of funds, will be leading the new global venture. Meanwhile, Jan Meulenbelt has been tapped to lead the development of the continental European fund of funds. Meulenbelt was previously the head of structured products for ING Investment Management. The new vehicles will invest in both third-party funds and ING funds, with a focus on unlisted vehicles.

INREV: Euro funds return 14.2 percent
The Amsterdam-based European Association for Investors in Non-listed Real Estate Vehicles (INREV) has announced that European private equity funds reported returns of 14.2 percent for 2005. Unveiled at the trade group's recent conference in Rome, the index surveyed 144 funds, representing more than €144 billion ($184 billion) in net asset value. The survey also found that funds focused on the retail sector posted the highest returns (23.6 percent), followed by industrial and warehouse funds (18.3 percent), office funds (12.5 percent) and residential funds (11.3 percent). The UK showed the best return by geography with 20.5 percent, followed by the Netherlands at 12.1 percent. More than €110 billion in capital was committed to diversified property-type strategies in 2005. Geographically, pan-European vehicles attracted €67.7 billion in commitments, followed by the UK with €40.5 billion and Germany with €15.6 billion.

Barcelo launches new resorts venture
Spanish lodging firm Grupo Barcelo has launched Playa Hotels & Resorts, a new portfolio company that will acquire and develop beachfront resorts in Latin America, Mexico and the Caribbean. The vehicle has raised $580 million (€454 million) from institutional investors including Barcelo, Merrill Lynch Global Principal Investments and Marathon Asset Management. The company will be headquartered in Palma de Marco, Spain and fronted by Bruce Wardinski, who is also the president and chief executive officer of Barcelo Crestline, which will function as Playa's asset manager. The venture has already acquired four resorts in Mexico which will be branded under the Barcelo banner.

NPRF commits to more property
Ireland's National Pensions Reserve Fund (NPRF) has announced a 5.4 percent return on its investments for the first quarter of 2006—and has committed €135 million ($172 million) to three new property investment vehicles, according to the pension. The fund has invested €50 million in the Morgan Stanley Eurozone Office Fund, €50 million in Forum European Realty Fund II and €35 million in the German Retail Box Fund. The pension has a target allocation of 8 percent to property and hopes to achieve the target by the end of 2009. NPRF had a value of $16.6 billion at the end of March.