The downturn has moved alignment of interests and the use of INREV Guidelines up the agenda while the appetite for higher-risk investments remains in spite of the increased volatility. Andrea Carpenter presents the findings of INREV's 2009 Investment Intentions Survey

The mark of the fallout of the ongoing financial crisis is clearly stamped on the results of this year's INREV Investment Intentions Survey. This annual report gauges the views of participants in the non-listed property funds market on the trends and preferences for the coming 12 months.

Its results show marked shifts in investors' views on allocations to real estate as well as changing risk appetites in changing market conditions. The results also highlight clearly priorities for issues such as alignment of interest and implementation of the INREV Guidelines, which have become increasingly important as the market has moved into a downturn.

Results for the Investment Intentions Survey 2009 were sent to a senior representative in the relevant INREV member organisation, with the intention for each response to represent a company view. The survey was sent to 243 member organisations comprising investors, fund managers and fund of funds managers. In addition, the survey was distributed by email to IPE Real Estate's readership for the third year in succession.

It is no surprise that the trends most weighing on the minds of respondents related to the lack of availability of debt and re-financing issues in the market as well as concerns over having reliable valuations in a market which has come to a virtual standstill in the last six months of 2008.

Many respondents saw additional problems rising up the agenda. This included the concerns over the strength of the occupational markets as tenant demand is hit by the economic slowdown. Some respondents also predicted that there would be casualties among the non-listed fund participants through bankruptcies and restructuring.

In addition, a small number of positive points were noted by respondents, such as the possibility of identifying investment opportunities during this period of market weakness, and the premium likely to be placed on active management. It was suggested that this will be a time for real estate to go back to basics: meaning equity-based investment, low leverage and income management.With these topics in mind, the survey also asked respondents to estimate the length of the downturn by asking which year they thought an improvement in the European real estate market would be seen.

As figure 1 shows, just over half of fund managers and fund of funds managers within the non-listed real estate industry expect 2010 to be the year European real estate will most likely show the first signs of a recovery. Investors, however, are less optimistic, with over two-thirds predicting sentiment starting to improve only in 2011. A significant number of fund of funds managers (23%) did not expect to see any improvement until 2012.This pessimism may feed into the results regarding allocations to real estate over the next two years. Intentions by investors to increase allocations to non-listed real estate over the next two years have fallen to 63% compared with 82% last year.

As can be seen in figure 2, this drop is in a context of investors' reducing allocation expectations across all the real estate investments methods except direct real estate. This more conservative view over increasing allocations across all real estate sectors may be reflective of investors' concerns about the denominator effect across a multi-asset portfolio.

It is interesting to note that only one-third of investors intend to increase real estate allocations through joint ventures, a much lower figure than 2008 as this goes against views that with market volatility, joint ventures will increase in popularity as it gives investors more control over their investments.

The downturn has also affected respondents' views on risk appetite across the three styles of investing: core, value added and opportunity (figure 3). Investors' preference for more conservative risk/return investments has grown, with 37% now favouring core as a preferred style compared with 5% in 2008. The shift has been away from value-added funds, indicating that a proportion of investors are moving down the risk/return scale in their risk preferences. However, it has to be noted that the proportion preferring opportunity funds has remained constant at 37%, illustrating that there is still a strong group of investors who remain committed to higher risk/return investments despite the more volatile market conditions.

This result also contrasts with those of expected allocations by style for non-listed real estate allocations for investors and fund of funds managers as well as new launches by style for fund managers, from 2009 to 2011 (figure 4). Half of investors surveyed expect to increase their allocation to opportunity funds rather than core funds (36%). In contrast, and more in line with investors' preferences detailed above, the largest proportion of fund managers is expecting new launches for core funds (58%) with opportunity funds in second place (46%).
For the first time, we also asked respondents if the market conditions would impact exposure to non-European non-listed funds or the launch of new non-listed funds outside Europe over the next two years (figure 5). At 40%, a smaller percentage of investors relative to the fund managers and fund of funds managers intend to increase their exposure to non-European non-listed funds over the next two years. This may reflect a tendency for investors to revert to traditional markets in uncertain times. Fund managers and fund of funds managers are showing a somewhat greater tendency to increase their commitments outside Europe.

All three respondent groups still see access to expert management as the most important reason for investing in non-listed property funds, similar to previous surveys (figure 6). The only main change in this area has been that over 40% of investors now regard diversification benefits for an existing multi-asset portfolio as a key advantage to investing in non-listed real estate, up 20.2 percentage points from the 2008 survey.

In a separate question on this same topic which looks at the relative importance of these factors, access to new markets has decreased in relative importance, which could partly reflect the fact that investors have now gained exposure to many of the locations where they wish to hold assets as well as concerns over the liquidity of less mainstream locations in the market downturn.

The more interesting change has come in the factors which respondents see as obstacles to investing in non-listed real estate (figure 7). Alignment of interest is now the main obstacle for investors in non-listed real estate and was cited by half of investors surveyed. This overtakes transparency and availability of market information as the main obstacle for investors.

This shift in part reflects the tests which have been made on alignment of interest structures such as co-investment and performance fee structures during the downturn in the market. It shows a need for further discussion in the industry on this topic to ensure that investors and fund managers and aligned during all parts of the cycle.

Alignment of interest is also perceived as a key issue for fund managers and fund of funds managers but in their view transparency and the availability of market information is still the main obstacle. It is no surprise that availability of debt, a new factor added this year was cited by high numbers of fund managers and fund of funds managers at 32% and 38% respectively and around 17% of investors.

Other important improvements for the industry were highlighted in responses to questions on the most important criteria for fund selection (figure 8). Almost 40% of fund of funds managers noted corporate governance as an important criterion for investment while 10% of investors (up from 3% in 2008) outline the adoption of the INREV Guidelines as an important criteria for fund selection.

Respondents were also asked about the relative change in importance of these factors. Here, the adoption of INREV guidelines was now seen as relatively more important than last year by all categories: 73% of investors, 82% of fund of funds manager and 83% of fund managers. INREV has just completed the integration of its eight sets of industry guidelines into one document, and their continued implementation by fund managers will be an important priority for 2009.

Looking forward to preferred investment locations for 2009, the UK was rated the most popular location, in terms of performance prospects for 2009, for investors, fund managers and fund of funds managers. This shifts from investors' choice of France in 2008 with fund managers and fund of funds manager preferring Germany. This selection is likely to be a result of the UK being the first European property market to react to the global financial and economic crisis and therefore likely to be the first to bottom out.

Germany is the second most preferred national market in Europe among respondents which may reflect the perceived lack of volatility in this market so far. However, respondents' interest in the Nordic markets has waned from the 2008 survey, though it is holding up strongly among fund of funds managers, who also show considerable enthusiasm for Central Europe.

For the first year, respondents were asked to pick preferred location and sectors in combination. The UK's preference is reflected across these choices with UK office and retail dominating investors' responses. Fund managers and fund of funds managers are in general agreement with this with the addition of German residential (the interest in which is not reflected by investors).

The results of the survey confirm many of the trends being seen in the market towards the end of the year as the availability of debt and market confidence decreased. It also highlights important priorities for INREV in 2009 with a further focus on alignment of interest and the implementation of the INREV Guidelines.