EUROPE - More European non-listed real estate funds must appoint independent directors to their management boards if corporate governance in the sector is to be improved, according to a new report.

The European Association for Investors in Non-listed Real Estate Vehicles (INREV) found 84% of member funds have non-executive boards, but they generally do not contain truly independent directors who can protect investors' interests and prevent conflicts of interest.

INREV's latest Corporate Governance Best Practice Review showed levels of compliance with INREV Guidelines were good, but found that gaps in market practice - such as appointed independent directors - suggested there was room for improvement.

It also highlighted the need to improve on transparency, accountability and alignment of interests.

Alasdair Evans, chairman of INREV's corporate governance committee, said: "We would like to see more independent directors in funds, greater accountability of managers through more effective termination provisions, greater alignment of interest through more co-investment, better fee structures and controls over conflicts of interest and generally better transparency, particularly side letters."

Some of the "gaps" highlighted in the report, such as in relation to alignment of interest, reflected issues that have been raised as a result of the downturn.

The study showed 19% of funds in the study did not have co-investment by the manager, the sponsor or individuals, while only 9% of funds have the management team transparently co-investing.

The review also identified that funds generally have limited controls to prevent conflicts of interest with other funds run by the same manager with overlapping strategies. 

Stronger protection for investors is required in this area, the committee concluded.

Another issue related to investors' ability to remove managers. 

The review showed 77% of funds allow the removal of the manager with cause, but that the barriers to implementing such a clause were high, which reduced effective accountability. 

No-fault removal is possible in only 31% of funds and then at a high price, with compensation of 6-24 months of fees and carried interest.

Gaps in transparency were also identified, including the limited ability of investors to appoint funds' independent auditors or independent valuers, as well as the limited ability for investors to call investor meetings, and the very limited disclosure of side letters.

INREV issued its corporate governance principles and guidelines in December 2006 to establish common and workable standards for institutional non-listed European real estate funds.

They now form part of the integrated guidelines INREV released in January 2009.