EUROPE - The non-listed real estate fund industry in Europe is collectively paying the price for the use of excessive leverage by a minority of fund managers, according to a report by the European Association for Investors in Non-listed Real Estate Vehicles (INREV).

The research also found there had been a breakdown in trust not only between fund managers and investors, but to some extent across the entire investment fund universe.

Lonneke Löwik, director of research and market information at INREV, said: "Analysis indicated excessive gearing used by a minority of funds brought down returns and the industry into disrepute, but it is unfair to stigmatise the wider industry that behaved more rationally."

The situation has prompted institutional investors to push for more control and closer alignment with fund managers going forward, while they use their financial firepower to shape the fund management industry to suit their requirements.

"Our research demonstrates that, on a like-for-like, ungeared basis, non-listed real estate has performed on par with other real estate investments, excepting the overall weak performance of the sector," Löwik said.

"Many of the reasons that make non-listed an attractive investment have endured, but the industry has changed, with investors demanding deeper due diligence and a more binding relationship with fund managers than before the crisis.

"We consider this a natural evolution, not revolution.

INREV's report concludes that the widespread loss of trust across sector was caused by a false impression of liquidity, which drew in short-horizon investors whose objectives differed significantly from long-term investors during the crisis.

This has led to closer alignment of interest between fund managers and investors, manifested in changes to management and performance fee structures, with more insistence on continuity of personnel and co-investment, as well as a much greater emphasis on rewarding value realised over the longer term, rather than notional value in the short term.

Matthias Thomas, chief executive at INREV, said large institutional investors would increasingly seek to partner with fund managers in an effort to create new products that could be used to underwrite strategy and ensure alignment of interest.

"As investors seek greater control and more accountability, fund managers are paying the price for the failure of a few who did not exercise their fiduciary duty during the crisis," he said.

"While the strong reasons to invest in non-listed real estate proved extremely durable over the crisis, the report shows investors are much more engaged and demanding fundamental changes in the investment model."