Real estate fund managers are finding ways to help investors move up the risk curve. Shayla Walmsley reports

Investor demand has been overwhelmingly weighted towards core products and fund managers have responded accordingly. Now there are signs investors are ready to move up the risk curve and out of their comfort zones.

“Investors are still basing their decisions on whether the house will stand behind the fund,” says Rob Wilkinson, CIO at AEW Europe, following AEW’s recent announcement that it had raised €176m for a French retail fund that covers all sub-sectors, especially in secondary locations. “They’re buying into the track record. There are less quantums of capital involved.”

He adds: “You have to become more cautious in how you invest capital. Risk management is more important. It’s harder to get investors comfortable.”

Even where investors are willing to take slightly higher risk for higher returns, they are looking for reassurance - in the case of German property firm PATRIZIA’s new residential fund, via participation and a credible exit strategy. In September the firm announced a joint venture with an unnamed pension fund to launch a €100m residential property fund targeting both value-added assets and development opportunities. The fund has a built-in exit strategy that allows for the sale of repositioned assets during the investment process.

While it remains difficult to attract new investors and to raise new capital, the emphasis has been on follow-up funds, with fund managers carrying over investors from the previous fund.

“In this market, everyone takes a lot of persuading,” says Ray Palmer, founder and chairman of Palmer Capital, which closed a €116m follow-up opportunity fund at the beginning of October, bringing almost all the investors in its predecessor to the new fund. “But clearly if they didn’t like how we handled the first fund over the past few months, they wouldn’t have gone into a new one with us.”

The same could be said for Henderson Global Investors, which recently announced that it had raised £66m (€76m) for its fifth US multi-family apartment fund - some of it from three public pension fund investors that had invested in the previous four. Henderson reckons CASA V will be the largest in the series by the time of its final close next year.

Significantly, the CASA funds have had the same management team since 1993. Some of its investors have participated in all its predecessors; others in only a couple. Ed Pierzac, chief investment strategist, says he expects three or four new clients in the second phase of the close. “Investors are comfortable with the team, with the previous funds, and with the portfolio performance in the past few years,” he says.

Another strategy for attracting new investors is joint ventures where one partner provides the assets and the other provides the investors. An example of this is the recently closed deal between Sarasin, the Swiss private bank, and German property firm Catella, for a green building fund. Although the fund was said to be targeting German and Austrian pension funds, Sarasin’s Swiss pension fund clients have contributed the bulk of €70m in capital for the fund, which has an eventual target size of €500m.

Portfolio manager Benedikt Gabor acknowledges that Catella could only have attracted Swiss capital with the support of a domestic partner. “Over the past six to 12 months, Swiss pension funds haven’t been able to buy properties anywhere in Switzerland. The market has been sold off. So they’re more open to invest in assets outside Switzerland,” Gabor says.

If one theme is access to capital, another is the ability to deploy it. Fund managers have been nothing if not resourceful. Palmer Capital is a shareholder in nine property companies that have provided 41 assets for its €116m opportunity fund.

Describing off-market access to deals as “a unique advantage for us”, Palmer says the fund manager is targeting two categories of asset: those it can turn into prime, and value-added. “There aren’t that many of them in the market but we’re better placed than most to access them,” he says, citing examples of prime central London acquisitions and industrial in Aberdeen with short-term tenancy agreements but planning consent for residential.

In terms of sector, parts of the US market are re-emerging with investment appeal. The big news in recent fund launches has been a $1bn (€725m) joint venture between APG and US public pension fund TIAA-CREF targeting US ‘super-regional’ shopping malls. Like the Henderson fund, the joint venture is evidence that some parts of the US real estate market are re-emerging as serious going concerns.

Scott Kempton, managing director of global real estate portfolio management at TIAA-CREF, which has real estate assets under management of around $17bn, says the US institutional investor had been looking for “a like-minded institutional investor partner to provide additional buying power” that would give it more diversification and scale within the sector.

Here again, form matters. That APG is primarily a long-term financial partner is clear from the terms of the agreement. Although it stresses an alignment of interest, TIAA-CREF insisted on a 51/49 split to reflect the fact not only that it had sourced the initial investments and was acting as managing partner in the venture, but because it had 60 years of experience.

“Both firms take a long-term view with regard to their investment, given the irreplaceable nature of the underlying assets. In addition, new acquisition opportunities of these highly productive assets don’t come along very often,” says APG managing director Steve Hason.

There is also a sense of know-your-partner caution. Hason says TIAA-CREF and APG have co-invested in several other ventures in the US. Although no further imminent joint ventures are in the offing, both parties might opt for them if they identify market opportunities.