EUROPE - The real estate fund model "is not dead", and institutional investors should be wary of seeking too much direct control over future property investments, according to Partners Group.

Co-head of real estate Claude Angéloz warned that the trend towards direct investments and separate accounts with greater investor involvement could lead to disappointment over the next few years.

"Many investors underestimate the time and resource requirements that come with a more hands-on approach," Angéloz told IP Real Estate.

The comments come soon after a survey by INREV found that separate accounts were on the rise among its investor members, with 15% of respondents expecting to increase their real estate allocations in this way, and no investors intending to reduce their separate account exposure.

"By being part of investment decisions at the outset, investors cannot point fingers" if and when investments go awry, and performance is below expectations, Angéloz said.

"They will be on the hook," he said.

However, Partners Group, which specialises in private investment markets, including non-listed real estate, does not recommend a focus on committing capital to new 'blind pool' real estate funds, or 'primaries'.

In the latest 'Private Markets Navigator' report for investors, the firm said it "continues to underweight primaries" versus direct and secondary real estate investments, "since the timing of investments is critical in today's fast-changing market".

Angéloz said Partners Group was "generally agnostic" when it came to accessing real estate investments and the use of investment products.

But he said investing in new blind pools today was effectively "taking a bet on where pricing would be in two of three years' time", due to the uncertainty around the timing of capital deployment by the manager.

Partners Group continues to be openly sceptical about the current pricing of core real estate, particularly in the top-prime end of the mature markets of Europe and the US.

Angelika Eibl, vice-president with responsibility for research and strategy for private real estate at Partners Group, said the growing appetite for core real estate - often as a substitute for low-yielding bond markets - was not supported by market fundamentals, which she predicted would "move sideways at best".

The Navigator report said: "Core investments, for instance, are generally considered 'safe'. Yet, small cap rate expansions would result in relatively large value corrections due to the low yield levels of such properties. We currently view this market segment as overpriced."

For these reasons, Partners Group favours real estate in secondary locations in tier-one cities and prime locations in tier-two cities.

The investment manager also backs mezzanine and preferred equity investments over core equity investing, and is bullish on opportunities to buy secondary interests in existing real estate portfolios.

Angéloz said Partners Group had executed $600m (€455m) in 'secondaries' deals in 2011 and said pricing had become more favourable to buyers as a result of the number of potential sellers significantly outnumbering buyers with the necessary expertise.

"The beauty is, less than a handful of institutional operators have the skill set" to undertake these sorts of deals, he said, while a growing volume of investors are looking to exit funds and portfolios.