EUROPE - Investment managers will have to "make adjustments" to meet investors' demands if they are to capitalise on increased appetite for real estate when new regulations - such as the Alternative Investment Fund Managers (AIFM) directive - come into play, according to a new study from State Street.

Those fund managers to survive recent waves of consolidation will also have to decide whether to invest in new reporting frameworks demanded by investors, the report claimed.

State Street said the alternatives were to outsource reporting or to keep administrative costs down by teaming up with other fund managers to compete for business.

The report also identified a divergence of interest and influence that that could in future create friction among investors in shared commingled real estate vehicles.

Large institutional investors coming to a fund with seed capital are likely to negotiate lower fees than subsequent investors, said the report.

Amid downward pressure on manager fees and demand for more frequent reporting, the report also pointed to investors attempting to negotiate fund strategies before set-up.

Furthermore, tensions could rise between original "locked-in" fund investors and those who have bailed out funds by injecting additional equity at a later date, thereby diluting the interests of the former, State Street said.

In the meantime, despite significant variation across risk appetite, preferred structures and asset-level involvement, the report forecast that investors would increase their allocations to real estate in an attempt to rebalance their portfolios as equity markets return to equilibrium.

"The good news is that the fundamental attractions of real estate as an asset class have not changed," the report said.