EUROPE - Fund management fees in non-listed real estate vehicles have yet to be affected by the market downturn, but this is expected to change according to the European Association for Investors in Non-listed Real Estate Vehicles (INREV).

The association's latest report on management fees and terms showed that just 22 existing funds out of 268 altered their fee terms in 2009.

The impact of fee terms and levels are difficult to gauge in a market which has seen a limited number of fund launches, but research revealed that discussions over fees were common during the 12-month period.

"Interviews with investors and fund managers identified problem areas with fees that were now under review," said Lonneke Löwik, director of research and market information at INREV.

Investors are less prepared to accept fund management fees based on gross asset value (GAV), because they believed this has encouraged the use of higher levels of gearing and a quicker pace of investment in some funds, INREV found.

The study showed that fees based on net asset value (NAV) or committed capital are preferred.

"Committed capital fees are now seen as beneficial in markets which have not bottomed out to temper the pace of investment," Löwik said.

According to the study, 88% of funds report a management fee as part of their annual management fees, of which 53% base this on GAV.

The average fund management fees based on GAV is 0.59% for core funds and 0.61% for value-added funds (opportunity funds, which apply different bases for their fund management fees, had an average of 1.64%).

INREV predicted that changes in investor attitude to fee terms and levels would manifest itself in upcoming fund launches.

The study also predicted changes to performance fee structures, which were employed by 82% of funds, either periodically, at termination or in both cases.

Survey interviewees said performance fees were more likely to be charged on realised returns rather than unrealised returns, based on valuations in the future.

"There is also likely to be some adjustment of hurdle rates, to move closer to the fund's target internal rate of return [IRR] in new funds," said Löwik.

INREV said the survey results also showed that the adoption of a total expense ratio (TER) was increasing among its funds membership, although only 26% reported they use TERs.

Of those, close to 60% reported a TER in line with the association's TER guidelines.

"Improving the transparency of fees is still a priority for INREV and the levels of adoption of INREV TER show that initiatives to support this are gaining momentum," said Andrea Carpenter, interim CEO at INREV.

"We intend to do more work on fees in 2010 with our newly-established Fees Committee, as well related work such as a project to better understand alignment of interest structures."