The rapid globalisation of the financial markets will impel a reappraisal of traditional property investment strategies, spurring investors towards a 'total-return' approach to segmenting their portfolios, according to Joanne Douvas, principal and co-founder of New York-based Clerestory Capital Partners. 'Capital has become extremely global and it is now being sourced by fund managers around the world. We think a sensible way to align with this trend is at the real estate fund-of-funds level, by investing globally - segmenting the funds market not by geography, property type, or niche strategy, but by size of fund and investment return strategy.'

The rapid globalisation of the financial markets will impel a reappraisal of traditional property investment strategies, spurring investors towards a 'total-return' approach to segmenting their portfolios, according to Joanne Douvas, principal and co-founder of New York-based Clerestory Capital Partners. 'Capital has become extremely global and it is now being sourced by fund managers around the world. We think a sensible way to align with this trend is at the real estate fund-of-funds level, by investing globally - segmenting the funds market not by geography, property type, or niche strategy, but by size of fund and investment return strategy.'

Prior to establishing Clerestory earlier this year, Douvas was head of the real estate fiduciary services group at JPMorgan Asset Management. She and her Clerestory cofounder Tommy Brown, former global head of real estate for Deutsche Bank Private Wealth Management, are looking to invest in what they call 'high-octane' opportunistic funds globally while seeking out managers with very broad skill sets. Clerestory believes investment vehicles of different sizes, including real estate funds, generally have different investment characteristics. It is therefore taking a lead from the equity markets: segmenting opportunistic real estate private equity funds into what it calls large-cap (more than $1 bn/€ 742 mln of commitments) or small-cap (under $1 bn) pools.

Inrev, the body representing investors in Europe’s non-listed real estate funds industry, defines opportunistic funds as those driven primarily by capital returns. Their return targets are in excess of 18.5% a year net of fees and taxes, with capital leverage rates in access of 70% of gross asset value. In a recent research study, Clerestory calculated that there are currently 197 opportunity funds actively investing globally. Within this universe, they estimate there are 71 small-cap funds, either in the market or soon to be, seeking to raise approximately $30 bn of equity; and 17 large-cap funds aiming to raise $64 bn.

The Clerestory principals concede that there is no empirical evidence from the real estate market that small-cap managers routinely outperform their larger peers - although small funds tend to be run by newer managers, and studies have shown that first and second property funds in a series outperform later funds. As for the broader private equity market, there is a 30-year history of research - twice that for real estate private equity - which indicates that smaller funds do perform better. Within both segments, however, there is also a history of star outperformers, which Douvas says underlines the critical importance of manager selection.

'The large funds tend to be the global allocator funds,' she says, 'and the small funds have the potential to be more nimble and potentially more efficient. As for larger fund managers, they argue that they have access to the megadeals and lower financing rates from banks. But the small guys can also execute these big deals by bringing in other capital sources such as bridge equity.'

But is now the time to be considering investing in opportunistic real estate funds around the globe, with interest rates rising and the effects of the US subprime mortgage crisis rippling out across markets? ‘I think it's a great time,' says Douvas. 'The moment there is the next big market dislocation, you want capital poised to take advantage of it. There are also many mispriced assets in Europe and much of Asia; so in a lot of places, you can get outsized returns right now.' She points to Japan as a continued attractive opportunity, underpinned by the arbitrage between property returns and extremely low interest rates, which she says basically provide 'free money' for investments. In Europe, she says Germany remains a focus of attention due its improving economic fundamentals, the backlog of real estate assets being shed by corporates and the country’s G-REIT (real estate investment trust) legislation. Traditionally, US investors have been the major participants in real estate opportunity funds and have fuelled their growth globally; while European investors have tended to invest outside their own countries by going pan-European rather than venturing to Asia and the US. But now, says Douvas, there’s evidence Europeans are following in the footsteps of their US peers.

This article by Steve Hays, founding director of Bellier Financial, based in Amsterdam, appears in the September issue of PropertyEU Magazine.