EUROPE – INREV marked its 10th anniversary with a rather unusual – and somewhat surreal – spectacle in Barcelona. It involved Willem de Geus of Proprium Capital Partners and Pieter Hendrikse of CBRE Global Investors playing the role of newsreaders, presenting a tongue-in-cheek news programme that ran through the real estate association's highlights since its inception in 2003. It is safe to assume that never before has an audience laughed so enthusiastically at a joke about the difference between joint ventures, club deals and funds.
It certainly provided some comic respite for an industry continuing to contend with economic and commercial uncertainty. There are the ever-present concerns about the European Union (the opening keynote by Roger Nightingale, economist at RDN Associates, warned about his profession's inability to forecast, and the very real dangers of Europe getting caught in a period of lingering depression), but INREV itself faces three difficult challenges.
Originally set up as a club for European institutional real estate investors, INREV is attempting to adapt to an increasingly global market. Collaboration with ANREV in Asia and NCREIF in the US means it will be able to start publishing a global core fund index next month. You only had to look at the line-up for one of the investor panel discussions, which included Eric Lang of the Teacher Retirement System of Texas and Wenzel Hoberg of the Canadian Pension Plan Investment Board (CPPIB). Hoberg was one of three new INREV management board appointments announced.
It is also interesting to note that INREV will be holding its first ever 'North America Seminar' in New York this summer. "We see that capital is raised on a global basis and is deployed on a global basis, so confining ourselves to Europe is really limiting the possibilities," INREV chief executive Matthias Thomas told a collection of journalists ahead of the annual conference. "If we talk with our members – being a global fund manager or a global investor – they do not want to have a set of Asian standards, a set of American standards and a set of European standards."
The second challenge INREV faces is a moribund capital-raising market for new real estate funds and the growing attention being paid to so-called joint ventures and club deals. Last year, the organisation revealed its intentions to widen its focus beyond funds to joint ventures, club deals and separate accounts when it published its 'Growing Menu of Non-listed Products' paper. Fortunately, the 'V' in INREV stands for 'Vehicles' and not funds. Had it been called INREF, the associations might have had to undergo a name change.
Patrick Kanters, global head of real estate and infrastructure at APG, and Hoberg, whose organisations have become strongly associated with the rise of joint ventures and club deals, seemed keen to stress that they were not anti-fund per se.
Hoberg said the main reason for CPPIB's predilection for joint ventures was down to a desire to build up a portfolio to be held for the long term. Not only was this approach more capital efficient, it removed the need to reinvest capital that would inevitably flow back from closed-end funds with finite lifetimes. "But we still add funds or separate accounts on either new markets strategies where it makes sense," he said.
Kanters had a broadly similar sentiment. "There is no perfect blueprint for the exact structure," he said. "We don't rule out funds at all." In fact, "certain circumstances" could warrant a fund investment if there was "an appropriate governance structure".
At the end of 2012, APG was revealed as one of a number of large investors – including Allianz Real Estate, GIC and AP4 – in AREIM's latest Nordic opportunity fund. The Dutch pension asset manager's joint venture investment with Grainger in the UK residential sector is also structured as a fund that may eventually see other third-party investors move in.
Speaking before the start of the conference, Eric Adler, global CIO at Pramerica Real Estate Investors, who was another new INREV management board appointment, said "the line between what people call club deals and funds is blurring". He said today's real estate vehicles – whether termed joint ventures, club deals, separate accounts or funds – exist on a "continuum", often sharing characteristics, and simply reflect a "pragmatic approach" to the post-crisis market. "Some of that should be structural; I would assume that stays," he added.
If this diversity of approaches is not just a short-term phenomenon, then INREV is correct in its focus on what it terms "the growing menu of non-listed products".
But life is rarely simple, especially in the presence of regulators. Adler also said there was a lot more "clear blue water" between funds/clubs and joint ventures. This analogy might also be applicable from a regulatory perspective. The Alternative Investment Fund Managers Directive (AIFMD) includes an exemption for joint ventures, although EU regulators have failed to provide a definition for joint venture.
If the exemption were to make it through, it might place even greater clear blue water between joint ventures and the wider real estate funds industry. It might also increase the attractiveness of joint ventures to investors (conversely, investors may prefer the comfort of investing through regulated vehicles). But if the exemption is withheld, will it dampen interest in joint ventures?
The UK's Financial Services Authority (FSA) has provided its own definition, and the markets will have to wait to see if this is replicated by other national regulators and accepted by Brussels. Although there is a good chance that the UK's approach will be attractive to other regulators, there was some concern voiced by INREV delegates that the FSA might end up facing opposition in response to its wider euro-scepticism.
Regulation is the third principal challenge INREV faces. While AIFMD is proving to be an immediate headache (it comes into force in the summer), there are some more long-term concerns.
In fact, 'long-term' is the very concept causing consternation. The European Commission has launched a three-month consultation on how to encourage long-term financing to enhance economic productivity and competitiveness. But its green paper made no mention of real estate, focusing predominantly on infrastructure, implying perhaps that it is not deemed a long-term asset class.
INREV has responded with its own research report on how real estate as a long-term investment class plays a vital role for the economy in Europe. Jeff Rupp, public affairs director, told journalists INREV was arguing that real estate, which can help match the long-term liabilities of pension funds and insurers, should be viewed as a long-term asset class by the regulators.
Long-term real estate investors "are focused on the long-term income stream of the asset rather than the capital appreciation per se", Rupp said. "Having the ability to ride out the market cycles means you are able to invest counter-cyclically." This is critical for the economy because "counter-cyclical investing means you are able to produce economic growth, stimulate job creation and so on in down cycles. You're also able to help dampen the effects when bubbles build up."
It is this final point that may explain why regulators are reluctant to include real estate in their 'long-term financing' focus. "There seems to be a lot of perception in Brussels that part of the global financial crisis was caused by the real estate bubble," Rupp said. "We try in the research paper to make it clear that real estate bubbles are caused, in fact, by short-term investors coming in and investing on market momentum rather than long-term investors that understand the long-term mean value of the assets."