Real estate investment managers have had to adapt to the exacting requests pension fund clients have been asking of them. Angele Spiteri Paris reports
Institutions have become more demanding of their investment managers and expect more in return for their money. So how are real estate professionals dealing with this?
Simon Marrison, chief executive officer at LaSalle Investment Management, says: “Post-crisis, institutional investors want ‘discretion in a box’. That is, they want more upfront definition and want to know exactly how the money will be invested and how we would adapt our strategy were market conditions to change.”
He says upfront conversations ahead of any investment being made have risen in importance. “There is greater contact and the dialogue is more of a two-way process.”
According to Justin O’Connor, chief executive officer at Cordea Savills, the property management firm, the underlying property investments are basically the same as they were pre-crisis but the way they are packaged is very different.
“We have to try and give the investors what they want because clients are saying: ‘If we don’t get exactly what we want, we’d rather not make the investment.’”
He says that some clients have asked for Cordea Savills to source a portfolio and will only invest in it afterwards if they like what they see.
Paul Richards, head of European real estate at Mercer Investment Consulting in the UK, says: “Only very big investors have the luxury of making certain demands. Sovereign wealth funds, for example, would be in a position to ask an investment manager for something very specific but other, smaller pension funds don’t have that freedom unless they are able to band together.”
Richards does say that the medium-to-small pension funds he advises have become more demanding of their real estate managers, but in a different way. “They require more transparency, both in the technical sense in terms of reporting, and also in terms of communication. They want their manager to be open about bad news and they need that dialogue to be more clear.”
Alessandro Bronda, head of global property investor solutions at Aberdeen Asset Management, says: “The due diligence is much more lengthy and strict. Also, investors are keener to make sure the alignment of interests between themselves and the fund manager is there. They want to know that the fund manager is ready to co-invest.”
In the driving seat
As the institutions said (see pages 12-14), the power in the relationship has shifted and managers have to work harder for their money.
Matthias Thomas, chief executive officer at Inrev, the European association for investors in non-listed real estate funds, says: “Before the crisis there was a lack of oversight and of understanding investors, and the market was more fund-manager driven. Now it’s more investor-driven.”
Bronda agrees: “There is less capital to be invested, therefore, clients do tend to have the upper hand.”
The managers also agree with the view that their clients are less tolerant to gearing.
Marrison says: “Many managers got into trouble when they went up the leverage scale. Now I would say that what was 65% leveraged before the crisis became 50%; the old 50% became 35% and so on. Over time this will move a little bit, but I don’t think you’ll see us getting back to the pre-crisis levels, which is actually a good thing.”
According to Bronda, in Aberdeen’s case, the firm recommends using less leverage. It has done this at the same time as bringing down the amount of leverage it uses.
“We tell clients that we should be using less leverage. For example, our European Core Balanced Property Fund previously had a leverage level of 50% and we have brought this down to below 40% today.”
Thomas says: “We saw a huge shift in investors’ willingness to take risk. They have a preference for core funds with low exposure to development and non-income producing assets and gearing.”
But although tolerance to leverage has decreased, it appears unlikely that there will be a raft of unlevered real estate funds flooding the market any time soon.
Marrison notes: “You have to remember that a moderate level of leverage helps the portfolio be more tax efficient.”
But what should managers do in this tougher environment?
According to Laura Wilks, director of institutional business, property, at Henderson Global Investors, fund managers need to do their best to make their terms investor friendly.
“This means working out who your target audience is. They also need to consider the longevity of their strategy and what impact that should have on launch timing, as well as the target volume of equity. They need to think about whether they have the best team in the market to deliver a particular strategy, whether they can secure – or secure exclusivity on – a seed portfolio and whether they can work with a cornerstone investor or co-investor, or their own capital, to get a fund started.”
©2011 funds europe