With ANREV's fees study completed, an international comparison is possible with data from INREV, PREA and ANREV. Lonneke Löwik reports
The completion of the ANREV management fees and terms study for Asia this summer put the final piece in place to enable a global comparison study of fees for non-listed property funds active in Europe, the US and Asia. It allowed INREV in Europe, ANREV in Asia and PREA in the US to join forces with the results of their respective studies to offer a new level of transparency for investors and fund managers, particularly those with global remits.
All three regions have their inter-regional challenges with a great variety in basis and types of fees charged by fund managers. And this global comparison shows that the differences rather than similarities often persist when extending the analysis across the regions. However, interesting observations about market practice can be found, particularly when looking at annual management fees and performance fees.
In general, Europe and the US, as the more established markets, have developed their own distinct approaches. Asia, as a later entrant into the non-listed property funds market, appears to have adopted a mix of practices from both regions, in part due to the emergence of European and US managers in the Asian market.
The first common factor to allow comparison between the regions is that most funds across the three regional samples charge an annual fund management fee (often just one of several types of annual management fees).
Of the US funds from the PREA study, 39% typically based their annual fund management fee on invested equity. In contrast, gross asset value (GAV) was found to be the most commonly used basis in the European study by 53% of the European sample. In Asia, it was a mix with GAV (the highest at 29%), commitment and drawn commitment all being applied equally.
Style is an obvious driver in these different approaches with the US and European samples being more dominated by core while Asia is home to more value-added and opportunity funds. Indeed, a more in-depth look at the fee basis of funds by investment style does highlight differences in market practice.
Core funds in Europe base their fund management fee on GAV, whereas in the US market net asset value (NAV) is more typical. Value-added funds share similarities in their fee base with core funds in the European market and to opportunity funds in the US market. In Europe, opportunity funds apply a variety of fee bases with drawn commitment being the most common: 21% of the sample funds. Commitment and invested equity are reported by opportunity funds in the Asian and US markets.
With so much variety in fee bases, it is more difficult to compare fee levels across the regions, particularly as the US uses invested equity as its preferred basis, which is not used in the other two regions.
However, the results of the study show that fee rates are broadly harmonised for those based on drawn commitment across all markets at between 1.39% and 1.55%. Fees based on GAV are highest in the US market at 0.70% and the lowest in the Asian market at 0.41% with European funds falling in the middle. Conversely, for fees based on commitments and drawn commitments, funds investing in the Asian market are higher compared to those in the US, but this can also be affected by the leverage of the funds.
Those fees that are calculated on a common base between Europe and Asia, show that the average fund management fees are higher for multi-country funds than for single-country funds. The results based on GAV reflect this in Europe, while the Asian study saw similar findings for funds with fees based on drawn commitments. In the US, the size of the country means that single-country fees are higher and more in line with non-US multi-country fees. This is most likely linked to the size of the US market, which makes investments across the country akin to multi-country investments in other regions.
The charging of performance fees, or incentive fees as they are called in the US, is the other main common thread across the regions. They are equally commonly applied across the three studies at 81% of funds in Europe and 87% in both Asia and the US. In Europe and Asia, it is more common for a periodic performance fee to be rewarded during the life of the fund, whereas a combination of this and a termination fee is most typical in the US.
In all three studies, the majority of funds report a performance fee structure with a hurdle rate based on fixed internal rate of return (IRR) or total return, and a set share of the outperformance above this hurdle rate that is paid to the fund manager.
Across the three regions, the hurdle rate is set at similar levels and tends to be lower for periodic performance fees compared to performance fees at termination. However, there are differences in the levels of performance fees charged above the hurdle rate, particularly in the case of performance fees charged at termination. European funds report the highest share of the outperformance being paid to the manager for periodic performance fees and the lowest rates for performance fees at termination.
Interestingly, the first hurdle rates in all three regions are set significantly below the funds' target IRRs. Asian and US funds show larger average differences between the hurdle rate and IRR: 4.6 and 4.8 percentage points for performance fees at termination; 5.2 and 5.1 percentage points for periodic performance fees. These two studies include a higher percentage of value-added and opportunity funds compared to Europe, which are styles that typically place a stronger emphasis on rewarding performance, already well before the target return of the fund is achieved.
Other differences between the performance fee structures of US and Asian funds compared to European funds include the use of catch-up clauses. Around 38% of Asian funds and 31% of US funds with an incentive fee structure have a catch-up clause. In contrast, only 15% of European funds report them. Catch-up clauses were most prevalent among opportunity funds, although many value-added funds also apply them.
The European study by INREV and the Asia study by ANREV received responses from 284 and 86 funds, respectively, which represented GAV of $190.9bn (€132bn) and $82.9bn. The overall US study by PREA attracted 248 responses, but for the purposes of this comparison report a sample of 166 funds targeting the US was used, representing GAV $123.6bn.
Lonneke Löwik is director of research and market information at INREV