Investor sentiment was upbeat at INREV's annual conference in Istanbul in spite of the current industry malaise. Meanwhile cries for greater transparency were as loud as ever. Julie Henderson was there
Non-listed real estate funds have been hard hit by the credit crunch, as sellers expect to get lower returns if they dispose of their investments now, and leveraged buyers particularly are struggling to buy good value debt in the capital market to finance those deals. With investment potential all but drying up, one might have expected this year's INREV annual conference, held in Istanbul, to have an air of doom and gloom about prospects for this asset class. But, paradoxically, talk was of industry development, cyclical movement, risk management and globalisation.
The theme of the conference was ‘non-listed real estate funds mature in testing times' and there is certainly evidence of maturity as delegates expect the market to ‘professionalise' over the next 10 years. Last year, INREV set out the returns reporting standard it believes every non-listed real estate fund should follow, although they are merely ‘guidelines' at this stage. Interestingly, delegates from pensions investing are already stating that they now expect these guidelines to be the standard every firm must follow. Bernhard Berg, chief executive of the insurer AMB Generali Immobilien GmbH, said his firm struggles to manage the huge array of reporting differences from one company to the next, so firm officials now insist they "only want reporting done to INREV standardisation".
INREV's director of research, Andrea Carpenter, indicated that she expects it will be easier to deliver a wider range of reported returns indices in the future, on the back of this shift in thinking. That said, Lisette van Doorn, chief executive of INREV, was quick to note in her opening address that none of the 125 delegates correctly guessed the 2007 return of the INREV institutional index as -3.9%. Answers fluctuated wildly from -9.1% to 29%, prompting her to argue that greater transparency is still needed.
But perhaps what was more significant was the change in mood towards the fees investors now face in the real estate sector. During one panel session on how the credit crunch had affected real estate asset allocation, panellists described the real estate sector as the last still to achieve ‘professionalisation', in terms of transparency and reporting, fees, governance and investor attitude.
Philipp Koch, partner at McKinsey, suggested the demands non-listed real estate asset managers now face from investors are "the same issues the other asset classes faced 10 years ago". He summed up the mood of investors when he added: "We are confident and expect to see a certain professionalisation of structures within the real estate industry. Three to four years down the road, we will have a structure which facilitates the fee models investors need. But high transparency will be critical in securing real estate in the asset puzzle."
The issue of standardisation, in both reporting and fee models, was a hot one. INREV chair Johan Van der Ende, for example, highlighted that INREV research presented during the investor-only session revealed that asset managers operate more than 80 fee models. So managers should expect continued pressure for simplification and lower fees. A later panel session rounding up the conference found almost 94% of delegates believe INREV members should move towards the adoption of INREV guidelines on reporting, though a breakdown of data found fund managers to be less enthusiastic.
In contrast, however, Marc Mogull, managing partner of Benson Elliott Capital Management, was not keen to see standardisation of reporting as this would lead to ‘box-ticking'. Instead, he argued "people have got to stop thinking that transparency is a substitute for structures at the outset".
Similarly, Matthias Stürmer, head of real estate management at E.ON Energie AG, said he was unsure whether he actually wanted improved transparency, particularly in emerging markets real estate, as he believes widespread transparency would inevitably hit performance targets and returns. "We will be in another world if we have total transparency in every market," he said.
That said, questions about fee structures also tapped into the heart of a wider discussion about how investors want to divide their real estate allocations and where they view their assets.
Paul Kennedy, senior director and head of European research at Invesco Real Estate, sparked that debate with a presentation on risk assessment in real estate funds. During his session, it was revealed that the majority of investors now want to be in value-added or opportunistic real estate, yet it was unclear whether investors were able to sufficiently assess the risks of doing so.
There were also questions across the two-day conference about whether real estate investors can expect sufficient reward from investing in value-added or opportunistic property funds, particularly in relation to emerging markets real estate funds.
Likewise, evidence across all of the panel debates indicated the role of real estate as ‘beta' or ‘alpha' to pension fund investors is likely to go through a change over the coming years, in line with the pressure to improve fee levels and reporting. Michael Morgenroth, a member of the management board at multi-manager firm Gothaer Asset Management, said he felt "the real estate market for core products could still be good enough", arguing "there is still some yield in the market, especially in the core sector".
But Christopher Reece, chief executive of Reece Alternative Investment Management, said investors have to be able to move real estate assets more quickly and the days of real estate being "long-only beta" has to change.
As real estate investors ‘globalise' their investment strategies in the same way as other asset allocations, pension fund delegates said they would prefer to pay slightly higher fees to work with big-name partners in Asia while they learn about those markets, than sign up with smaller, lesser-known real estate firms.
Ric Lewis, chief executive of Curzon Global Partners and senior managing director of AEW Europe, said the one benefit he has seen since the credit crisis hit last summer is that investors have begun to review their portfolios and in many cases are looking at the wider global market for investment potential.
"Over the last 60-90 days, we have finally been seeing that people are willing to deal with the problem [of asset allocation in these conditions] and talk about rebalancing their portfolios. But it will still be 12-18 months before any work is completed," said Lewis.
However, despite all the questions as to whether the market had work to do and how the credit crunch would affect the market in the long term, investors are still very positive. Many delegates suggested they were happy to wait until there was more supply on the market before buying again and merely considered what has happened to real estate markets over the last six months as a cyclical development pension funds are perfectly placed to cope with.
The questions asked of INREV delegates this year in their assessment of the unlisted real estate funds sector were not easy ones to answer. But the overall perception is that investors at this year's INREV conference are taking turbulent markets, their impact on non-listed real estate and the slowdown in property activity in their stride.
If anything, the market shift has given them the opportunity to take stock of their positions and consider how to deal with future asset allocation, with an eye on real estate playing as big a role in the future in pensions asset allocation as the bonds and equities sectors.
