Do consultants benefit investors or merely hinder managers? Sally Hodge investigates

Institutional investors and, in particular, pension funds, are growing in importance in the European non-listed real estate market. INREV's Capital Raising survey was set up in 2006 to measure the amount of capital entering this market from institutional investors. The 2006 survey concluded that pension funds continue to be the largest single investor group, accounting for almost 50% of the total €10.2bn invested by institutional investors during the year - an increase of just under 40% in 2005.

According to INREV's 2007 Investment Intentions survey, the real estate market is likely to experience a further increase in institutional investment in 2007. Just less than 80% of respondents expect to increase their allocation to non-listed real estate in 2007, and over 30% - typically the very largest institutional investors - expect to raise their allocations through joint ventures.

There is no doubt that the number of specialist strategies available to investors continues to multiply - infrastructure, whether a specialist area of real estate, or truly a separate asset class, is a case in point. As investment choices multiply, it becomes harder for institutions to build and maintain specialist in-house investment teams with expertise and experience of each new asset class.

The US institutional market has often been viewed as being at the forefront of new investment trends, as evidenced by the larger US institutions' early adoption of alternatives. In addition to this willingness to embrace the new came a more widespread dependence on investment consultants and specialist advisers - something of growing importance in the UK market.

INREV's Investment Intentions survey found that the majority of institutional investors surveyed identified consultants' advice as helpful in the investment process, compared with fund of funds managers, who saw it as having limited value.

Traditionally, consultant use has been less widespread in continental Europe than in the US and UK markets. Wietse de Vries, managing director of ING Real Estate Investment Management, with responsibility for institutional clients, believes that the US and UK markets have become highly consultant-driven, largely for regulatory reasons. For this reason, he is sceptical about whether consultant use will increase in the rest of Europe. "Trustees are less prone to being sued in continental Europe," de Vries says. He also points to the fact that it is important to define what is actually meant when talking about consultants.

"There is an important distinction between traditional consultants and managers who are offering fund of funds and advisory services," he says. De Vries sees organisations such as Aberdeen, Arlington and CBRE gaining ground, but despite this he does not believe that consultant use in continental Europe will increase to the levels seen in the UK market. "In the Netherlands, there aren't many advisers, as such," comments Robert-Jan Tel, head of real estate Investments, TKP Investments. TKP has no need to rely on consultants to augment its own in-house real estate investment team. Tel does see a change on the horizon, particularly for pension funds with between €100m and €1bn in assets. The smaller pension funds increasingly want to allocate a portion of their portfolios to real estate, but are less likely to have in-house expertise in this asset class, hence their need for external advice. "We work for a few pension funds, and they are looking for real estate investment more and more using Watson Wyatt-type advisers," Tel says. He believes that the number of advisers in indirect real estate investment is set to increase in Europe, as it has in the US. "The world is changing," Tel counsels.

Peter Cluff, principal and co-founder of Europa Capital, has seen an increasing use of consultants, particularly by investors, such as smaller pension funds, new to real estate as an asset class. Not only is real estate a new area for these investors - one where they do not have investment expertise or experience - but it also needs to be viewed in terms of the overall strategy and risk profile of their portfolio.

A consultant will take an overall view of the portfolio mix and determine the optimum real estate split, as well as drilling down into the asset class to determine specific geographic and sector allocations. For Cluff, the increasing complexity of cross-border strategies demands the specific expertise that certain consultants can bring to investors. He gives the example of a potential investor he met in 2006. "I arrived to give my presentation at 9am, only to find that the whole in-house investment team had been fired the previous afternoon and another firm of consultants had been appointed," Cluff says.

Although there is no general consensus over whether consultant use by European institutions will or will not increase, the increasing number of US institutions investing in Europe alone is bound to mean that European managers will be working with consultants on a more regular basis. INREV's Capital Raising survey found that US investors have streaked ahead of their European counterparts, moving from fifth to first place in the table of the largest investors in the European non-listed real estate market, with a little over 20% of the total capital invested (see table). With the UK, the next most consultant-driven market, in second place, the power of consultants in the European real estate market should not be under-estimated.

So what are the consequences of investors' reliance on consultants and advisers, both for the investors themselves, and for the managers they invest with? According to Tel, primarily, investors clearly benefit from receiving sound professional investment advice. "The professional investment advisers make asset managers give truly professional answers to their clients, and create good mandates," he says. De Vries agrees that working with advisers can make the whole process more efficient. "They are highly professional and ask the right questions," he comments.

In de Vries' view, this can work for the benefit of managers, as well as investors. "The consultants act as gatekeepers for a large number of clients, and we have a good working relationship with them," he adds. This ability for a manager to reach a number of investors via one consultant relationship can be a distinct advantage for the manager.

Cluff describes the example of a manager launching a new fund. An adviser will carry out a thorough due diligence review, including attending a detailed presentation by the manager, and then will (or will not) make a recommendation to its clients. The manager could find that one presentation to the adviser will result in a dozen of that adviser's institutional clients coming into the fund - clearly a very efficient use of the manager's time.

Moreover, consultants have increasingly opened up the real estate market to a new group of institutional investors.  According to Tel: "Consultants make the real estate market accessible for investors." Cluff agrees that consultants enable their clients to get access to funds and products that they would otherwise be unable to invest in. Often the high minimum investment required by managers will mean that a small pension fund, or a medium-sized institution that only wants to make a small allocation to a niche strategy, finds their $10m (€7.4m) is not enough to gain access to the best products. These institutions are therefore somewhat restricted to certain funds, asset classes and geographies.

A consultant can pool the assets of several clients - and $100m is a much more attractive proposition to a manager than $10m. The manager will also benefit from an increase in the potential diversity of its client base.

The institutions that an adviser can bring to the table are likely to be widespread in terms of where they are based and what type of investor they are. With a broader range of investors, a fund is less susceptible to a sea change of opinion in one sector, country or continent, giving the manager longer-term stability of asset retention, and the potential for a really long-term relationship with their investors.

Cluff also points out that a consultant can be the door that opens real estate as an asset class to institutions whose lack of in-house expertise means that they are uncomfortable with making their own real estate asset allocation decisions.
Even institutions that have experienced real estate investment teams can find it difficult to keep up with the growing globalisation of the market and the huge number of new products, not to mention emerging asset types, such as infrastructure and motorway service stations.    

It is clear that many investors are no longer investing solely in their domestic markets, but are seeking to spread their real estate investments worldwide.

The wide range of investment locations in INREV's 2007 Investment Intentions survey is evidence of this growing trend. Particularly striking is India, where less than 10% of investors surveyed currently have investments, but over 20% have plans to invest in 2007 and 2008; and China, with just over 20% of investors currently in the Chinese market, compared with a little under 40% intending to invest in 2007 and 2008.

There is a general perception that investors that rely on consultants have less of a risk appetite than those with in-house investment teams, perhaps led by the consultants' desire to stay with the safe option and avoid volatility.

De Vries, however, disagrees that this is the case, pointing to INREV's research as evidence. "I would doubt that there is a trend towards risk aversion," he says. "If anything, there has been an increase in the appetite for risk." The ability that consultants give to their clients to be able to spread their real estate portfolios over a wider range of geographies, asset classes and products is one probable driver of this trend.

Cluff gives the example of a UK life assurance company, which may have a certain degree of knowledge about the UK or even European real estate market, but when deciding on which funds to choose for its allocation to India, is likely to find that its in-house expertise is simply not up to scratch.

Limiting its real estate portfolio to the traditional domestic comfort zones is no longer seen to be in the best interests of its clients, whereas using an expert adviser or consultant can allow the institution to make the best possible allocation instead of the best allocation within a limited sphere of expertise.

The number and diversity of products available to real estate investors continues to increase - one needs only to look at INREV's Funds Database for hard proof of this - and Tel believes that this trend will continue, partly as a direct consequence of adviser and consultant use. "Advisers prefer choice," he comments.

Access to new products is another area where institutions can benefit from working with consultants. "A manager would normally go back to existing clients first to see if they want to re-up," says Cluff. A consultant with a close relationship with a manager may well be able to get its clients access to that manager's new product, before it is opened to the wider market.

Certainly advisers do need to provide added value for their clients to justify their role. That value can come as advice on, and accessibility to, new products and asset types; or the ability to access products or managers that would be unavailable to the institution as a direct investor. An experienced consultant is also able to take an overall view of the institution's portfolio, to optimise both the balance of alternatives within that portfolio, and to drill down into each separate asset class. Managers and holdings can be monitored on a regular basis: often the relationship that the consultant has built with managers allows them quick and easy contact to discuss a change in performance or a potential style shift.

With consultant use growing, Cluff believes that there is a real possibility that too much power could end up in the hands of a few consultants. The biggest danger that he sees is for consultants who cross the divide. He cites the example of a consultant who was being paid by fund managers and lost the respect of its clients.