EUROPE - Most European institutional investors are worried that the non-listed real estate funds they are invested in are likely to breach loan covenants, according to a study by the European Association for Investors in Non-listed Real Estate Vehicles (INREV).

The association's debt study found that 88% of investors and 85% of fund of funds managers expressed high levels of concern over potential breaches in their funds.
A higher proportion of fund of funds managers (53%) indicated they were very concerned, compared to 40% of investors.

INREV said this may be explained by more funds of funds adopting higher risk-return strategies, which have the potential to be more susceptible to breaching terms.

"The results clearly show high levels of concerns among investors, but fund managers have identified problems and are tackling them," said Lisette van Doorn, chief executive at INREV.

"The debt issues highlight the importance of transparent relationships between fund managers and investors as well as with bankers at this time."

The findings were backed up by interviews conducted with real estate bankers, who revealed they were generally satisfied with the responses from fund managers to debt issues.

However, some added they would like to see fund managers show more initiative to highlight or suggest solutions at an earlier stage where issues occur.

Bankers also said they would lean towards clients they trust in addition to those with proven management teams who could display a strong track record of active property management.

The study also showed that investors have been reluctant to commit fresh equity to existing fund investments, with one-third of investors and half of fund of funds managers turning down equity injection requests from fund managers.

"One of the main issues surrounding capital calls, such as those for additional commitments, is the high level of reporting requirements from investors for this sort of request," van Doorn said. "Investors want to ensure they have a good understanding of what the money will be used for and in these market conditions such a decision cannot be made lightly."

Investor respondents were also asked to rank style by the levels of problems being experienced: in line with expectations, respondents mainly rated opportunity funds highest and core at lowest.

However, it is interesting to note that one third of investors said they saw the most difficulties in value-added funds rather than opportunity funds.

INREV suggest this could be partly explained by the popularity of value-added funds in the past few years.

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