INREV Is the move to joint ventures and clubs the sign of a maturing industry or an overreaction? Lonneke Lowik examines INREV's latest research

A look at today's non-listed real estate industry gives a very different picture to the one seen before the financial crisis. There has been a shift away from the focus on non-listed property funds as the main approach towards an industry where investors have the appetite and the ability to invest in a range of non-listed products.

This change has occurred as the industry has emerged from challenging times and so can be viewed in two ways. It signals the maturing of the non-listed property industry, a universe that can offer investors a diversity of approaches to suit their requirements, whether by investor size, strategy or risk-return profile. However, with the market still in a state of flux, it can also reflect a market in transition.

INREV has produced its Guide to Non-Listed 2012, which sets out what the industry currently understands as the definitions and characteristics of each of these products by bringing together current thinking and market practice.

The report looks at the products currently under consideration by investors: non-listed property funds, joint ventures, club deals, funds of funds, separate accounts and private company investments. In addition, it considers real estate debt funds, which are an emerging investment product for the industry, and infrastructure funds, which are garnering increased interest but sit on the fringes of the non-listed real estate universe.

The results will support future work by INREV when it revises its guidelines and seeks to understand how and if these products should be incorporated into future industry standards to improve transparency, and therefore, accessibility of all products.

The results of the report show an industry not yet using a common language discussing, for example, joint ventures or club deals. The most confusion arises around joint ventures, which the report breaks down into three common approaches: around a single asset purchase; a joint venture investment programme; and a joint venture that, in reality, resembles a fund with a small number of investors. Even within these three definitions there is further divergence, with differing views over the number of (pre-identified or not) assets, and number of investors. The report's main point is to highlight the lack of common agreement in an industry where joint ventures are currently the most popular product, according to the recent INREV Investment Intentions Survey.
One common aspect when considering how these products are broken down is the number of investors included. Figure 1 shows that separate accounts, club deals and joint ventures all compete in the same space as they are all designed to appeal to a small number of investors; another reason that the industry should look for clearer definitions around these products.

The number of investors is not the only defining factor. To compete in this arena, investors also need the capability to actively contribute to these products as they demand a higher level of investor involvement. A qualifying factor then tends to be investor size, which implies that the products, and therefore the market, is skewed at this time towards larger investors.

Figure 2 maps the ability and likelihood of different-sized investors to participate in each various products. Large investors always score high on ability and the determining factor is whether they are interested in investing. For the smaller investors their ability to invest restricts the products they can participate in.

It might not be surprising that all the products tend to fall short of the levels of transparency available for non-listed property funds, which is the legacy of the industry's work through INREV. However, the reality is that the more private nature of joint ventures, club deals and separate accounts means there is very little transparency at an industry level. There is little data on the size and composition of the market or on specialist topics, such as fees or performance evaluation. Tailored guidelines for these products are not available either, although there is some evidence that, where it can, the industry is adopting parts of the INREV Guidelines.

It is interesting to consider these developments over a longer period for the industry, which might also then help us understand the next stages of its evolution. As the market has matured from limited partnerships first taking investors overseas in the early 1990s, investors have become increasingly willing to relinquish more control and discretion as they accessed the skills of expert fund managers.

This development would also have gained momentum by the fact that markets were performing well; the fund model emerged as the popular solution for institutions looking to access real estate. However, the impact on performance from the financial crisis has seen investors take back that control and focus less on funds. The INREV Index fell from a high of 18.6% in 2006 to a low of -19.8% in 2008. The speed of the crisis took the market by surprise; debt covenants for assets were quickly breached and many funds lost all or large parts of their equity.

It is therefore possible to view this period of development following the financial crisis as an overreaction, with investors taking back control. They are demanding bespoke solutions such as joint ventures and separate accounts, which has somewhat reduced the appetite for funds as the model is seen to still represent some of the issues of the crisis. With larger investors leading this drive, fund managers have been keen to meet their requirements.

These requirements for control and discretion might be moderated as the market improves and the industry implements the lessons it has learnt from the crisis into its products, particularly non-listed property funds. While joint ventures and separate accounts are likely to remain part of an investor's portfolio, the reasons they invested in non-listed property funds in the first place - such as access to expert management - are likely to re-emerge as important factors.

The report also explores a second way in which the universe is expanding, which is through the range of underlying assets that can be invested in. Infrastructure has sat on the sidelines in the minds of most real estate investors but looks to be becoming increasing popular alongside the rapidly emerging interest in real estate debt investing.
Both product types are similar in that their performance is less linked to economic cycles, so are attractive to investors in more challenging markets. For infrastructure, assets often have a monopolistic position and therefore benefit from income streams that are in general more immune to market circumstances. Real estate debt funds, meanwhile, are seen to give a form of property exposure, but the return is less directly linked to underlying property market performance compared with other traditional real estate fund investments.

The conclusion of this INREV report is that the growing range of products is an issue that the industry needs to take time to understand and discuss. On the whole, the trend is positive: a wider product choice gives investors more ways to invest in the real estate industry. However, the industry should seek to understand more about the definitions and characteristics of these products.

Lonneke Lowik is director of professional standards at INREV