Non-listed sector faces further polarisation and consolidation

The non-listed real estate sector is poised for a strong wave of industry consolidation as the overall real estate capital base decreases in the fallout of the financial crisis. Further polarisation into large and specialist organisations can also be expected.

These are some of the key findings of a report entitled Legacy of the Downturn published at the INREV annual conference currently being held in Venice. According to the paper, investors are currently reviewing their real estate investment objectives and there is an emerging trend for dividing portfolios into a core base with a small allocation to satellite funds. This trend indicates the possible creation of private equity-style alpha funds that sit alongside market beta funds focused on strong income returns. However, it is likely that the segment for alpha funds will become smaller, and more focused or specialised, the report concluded.

Investors also want to retain control and flexibility, fuelling the trend for joint venture and separate account structures. 'The financial crisis has prompted managers and investors to restructure their real estate investments focusing on greater direct control. As a result, joint ventures and separate accounts have become increasingly popular. But these strategies require resources and capital scale to develop a well-diversified, balanced portfolio, limiting this approach to the larger investors,' said Lonneke Löwik, INREV, Director Research and Information.

The INREV Capital Raising Survey 2011 reveals that fund managers raised EUR4.7 bn of capital for alternative non-listed fund products, of which nearly 45% was raised for separate account mandates. However, the strong interest in separate accounts is expected to ease off this year.

Another challenge facing the non-listed real estate funds sector is the sizeable level of uninvested capital which stood at EUR 25.4 bn at the end of last year. This is almost one third of the total capital raised in the market between 2004 and 2010. The Capital Raising Survey reveals that non-listed real estate vehicles raised EUR 10.5 bn in 2010, and that this figure is set to rise to EUR 11.5 bn during 2011.

At the same time, the fallout of the financial crisis has created opportunities for the non-listed real estate funds, Löwik said. Fund managers able to create new products, such as real estate debt funds, will be in a position to capitalise on the current debt capital-constrained market.