Inrev: Funds of funds gain appeal in non-listed sector

The non-listed real estate funds of funds sector is growing strongly and appealing to a broad range of investors, according to the results of a new survey released by the industry body Inrev. Large institutional investors are using the vehicles to gain access to emerging markets and 'best-in-class' managers while the sector is also attracting new investors for their first allocations to non-listed real estate.

'Funds of funds are a good access route into the non-listed property sector for smaller investors, but these results also illustrate that larger investors see the benefits of the vehicles when looking to enter new emerging markets or to gain access to niche and best-in-class managers,' Inrev Chief Executive Lisette van Doorn said.

The surveys - one for investors and one fund of funds managers - were part of a new research report that examines the development and characteristics of the funds of funds sector. The investor survey was completed by 30 institutional investors representing some EUR 95bn in real estate assets. The survey of fund of funds managers was completed by 18 fund of funds managers who manage 34 funds with an estimated EUR 14bn of target equity.

Of the 30 investors, 13 had invested in funds of funds, of which 42% had allocated more than EUR 50mln to them. This illustrates that the vehicles are no longer the preserve of smaller investors. The survey of fund of funds managers showed that the sector is bringing in new investors, with 74% reporting that their vehicles included investors allocating to the non-listed property funds market for the first time.

'It shows that the funds of funds market can give both seasoned and first-time investors access to the non-listed sector without having to put the necessary support infrastructure and resources in place or have first-hand experience of real estate investing,' said Dan Fulop, senior vice president with Franklin Templeton Real Estate Advisors and a member of the Inrev Research Committee.

Two thirds of investors were looking to the product to gain access to Asian markets, demonstrating the benefit of using funds of funds to enter emerging markets. This compares to 41.7% for Europe and 17% using funds of funds to gain access to global markets. Inrev estimates that the fund of funds market has grown to around EUR 20bn since the first non-listed real estate fund of funds was launched in 2000. The Inrev Fund of Funds Directory now holds information on 46 funds of funds representing EUR 16.1bn of target equity.

Investors in funds of funds said that diversification of investments, the outsourcing of fund selection and access to niche managers were the main reasons for choosing the fund of funds route. The two layers of fees are still seen as the main drawback for investors in the vehicles in both the investor and fund of funds manager surveys. Fund of funds managers typically charge an asset management fee for the fund with the investors also having to take on the costs of the underlying funds. Other drawbacks outlined by investors included insufficient alignment of interests between managers and investors and the lack of control over portfolio allocations and weightings.