Acquisition costs payable by long-term investors in open-ended, unlisted real estate funds using the amortisation method could be more than double compared with vehicles using the offer-spread method, according to Willis Towers Watson.
In its ‘Are you paying a fair amount to invest in real estate unlisted funds?’ study, the company estimated that long-term investors pay close to 15% in aggregate acquisition fees to a fund using the amortisation method.
The figure compares with around 6% in aggregate fees via the offer-spread method.
According to the company, the fundamental difference between the two methodologies is that the offer-spread approach applies the costs of investing new capital only to the investor whose new capital is being invested.
The amortised approach, however, applies the costs of investing new capital proportionately across all investors.
Douglas Crawshaw, head of EMEA real estate research, said long-term investors that subscribe to an open-ended fund that uses the amortisation method will “end up not only paying for the investment of their own unit of capital but also a share of everyone else’s in the future too”.
He added: “This means that, over the life of this investment, they would end up paying more in aggregate by investing in such a pooled fund than if they had bought the building direct through, say, a segregated account or via a fund that uses the offer-spread method.”
While the use of the amortisation method is not new, its use is growing in Continental Europe, the firm said.
More managers are structuring new funds using the amortisation method, or restructuring how an existing fund is priced to adopt this method.
This is in contrast to UK-based funds which favour the offer-spread method.
Willis Towers Watson said some investment managers claimed industry guidance around net asset value calculations effectively promoted the amortisation method.
It believes, however, that this was not the guidance’s true intent.
“We interpret industry guidance on the use of the amortisation method as only intended to enable a fair comparison of fund performance across the universe and not for pricing new subscriptions,” Crawshaw said.
“This is an important point, as investors are likely to be gaining false comfort from a manager’s interpretation of industry guidance on a fund’s net asset value calculation.”
According to the research, some managers are finding it harder to market offer-spread-priced products to investors more accustomed to the amortisation approach, with the latter perceived to be lower in cost.
Willis Towers Watson, however, believes that, in reality, investors are likely to be paying more than they should when investing in a fund that uses amortisation for fund pricing.
“The true long-term costs resulting from an investment manager using the amortisation method should be fully appreciated and compared with the offer-spread method when long-term investors consider making allocations to real estate unlisted funds,” Crawshaw said.
