INREV revealed last month that total returns for European non-listed funds were deep in negative territory. But the big story at the annual conference in Athens came from investors calling for changes. Richard Lowe reports

The mid-April weather in Greece was surprisingly cloudier and colder than it was in London when INREV held its annual conference. Perhaps it served as a metaphor for the differing market outlooks for 2009 on both sides of the English Channel. That is to say, despite the figures for the newly released INREV index showing the UK to have suffered much greater declines in total returns in 2008 (-49.6% when denominated in euros, compared with -9.8% for Europe ex-UK), there was a sense that this year it would be continental Europe's turn to go through most of the pain.

Andrew Smith, chief investment officer at Aberdeen Property Investors and chairman of the INREV benchmarking committee, said as much during a pre-conference press briefing, predicting that 2008 would turn out to be "the low point" for UK funds, while European funds would reach their lowest ebb this year.

On opening the conference, INREV chief executive Lisette van Doorn admitted that the index numbers - the chief one being a negative total return of -26.8% across all European markets - gave little "reason to cheer", but that things were unlikely to get much better in the short term.

"[With] a combination of the ongoing de-leveraging and refinancing challenges that lay ahead, the industry can expect hard times to continue for a while," she said.
Over the long term, however, real estate will reassert its traditional role in institutional portfolios: achieving risk-adjusted returns in between those of equities and bonds.

"With this in mind, non-listed real estate funds will need to stress their benefits in institutional portfolios, especially in comparison to direct real estate. And that is why INREV is making the marketing of the role of non-listed real estate funds in investment portfolios a top priority for this year," Van Doorn added.

It was relevant, therefore, for the audience to hear from Roderick Munsters, chief investment officer at APG Investments, the wholly-owned asset manager of one of Europe's largest pension funds - and the biggest in the Netherlands - ABP. Munsters gave an insight into the philosophy underpinning the real estate investments managed by APG for ABP and other pension fund clients.

APG is some way through a process that will see its real estate investments split into two sections: an ‘income portfolio' to hedge liabilities by outperforming index-linked bonds plus wage growth, and a ‘growth portfolio' to generate high returns using a long-term investment horizon.

Crucially, the latter is aiming for absolute returns, not benchmarked returns. "There is not so much a necessity of looking at what is in a benchmark and what the next guy is doing," explained Munsters. He went as far as to say he would prefer a portfolio manager to underperform the benchmark and return 8% than outperform the benchmark and return -18%. The latter scenario still represents a "bad job", he said. "I cannot pay pensions with -18%."

During a separate panel debate, Allan Mikkelsen, partner, investments at ATP, Denmark's largest pension fund, said there were similarities between APG's outlook and that of ATP. "I am a big believer that we will go back to the basics of real estate investing," he said. "It serves the same purpose in an inflation pocket. It is important to pass that message on to managers."

Mikkelsen's fellow panellists - including heavyweight investors such as Singapore sovereign wealth fund GIC Real Estate, US retirement giant TIAA CREF Global Real Estate and German pension fund NAEV - were pretty forthright about changes they wanted to see made to real estate fund products. They made it clear they saw the appeal of clubbing together with similar investors rather than investing blindly with numerous unidentified limited partners (LPs).

Munsters had already mentioned that APG was spending considerable time and resources seeking "like-minded investors" with which the institution could team up and "share knowledge".

Laura McGrath, managing director at TIAA CREF, also revealed that the investor was considering club deals, citing the lack of control in commingled funds when things go wrong.

"You put in place governance which you think should protect you in a time of difficulties," she said. "But when you have such a disparate investor base, [when] you have investors with varying degrees of appetite and regulatory ability to take a formal decision… it becomes very difficult."

Hermann Aukamp, CIO and director of real estate investments at NAEV, complained there had been a lack of proactive response from fund managers during the current real estate downturn, which was signalled as early as the first half of 2007 when Sam Zell sold Equity Office Properties Trust to Blackstone.

"We [have been] in this cycle for maybe two years. We talk about this all happening this year," he said. "Do we see any proactive movement by the managers in the 18 months? I think we have seen very little."

McGrath stressed the importance of transparency where fund managers are concerned. Indeed, one of the findings of INREV's debt survey was that although the vast majority of investors were concerned about potential loan-to-value covenant breaches, only one-fifth had committed fresh equity to secure investments.

"We are also being very careful in asking the questions as fiduciary to our annuitants: how are these capital calls being drawn down," McGrath said. "Is it good money after bad or does the manager really have a strategy in place? And where we feel it is not clear, we are pressing those issues to make sure… where there is limited liquidity it is being put to proper use."

Mikkelsen pointed out that transparency should extend to allowing all LPs to be identifiable. "There is no doubt that our due diligence going forward will also include knowing who are fellow investors are in commingled funds," he said.

However, if an investor commits during the initial close of a fund, it is impossible to know what investors will join in subsequent capital-raisings. Again, Mikkelsen was forthright. "That is one of the things that is going to change," he said. "I think we can dare provoke the audience a bit today and… say: if you need to go to an eighth close to have sufficient capital, maybe that product shouldn't be raised."

Despite the talk of LPs being aware of each other and in some cases clubbing together to exert more influence, the panel of investors made it clear that they were not looking to take discretionary investment decisions away from fund managers.

"I am looking for a manager with a particular expertise that I don't possess and which the other LPs do not possess," said Tim Hoeppner, managing director at McArthur Foundation. "So I am not looking to take discretion away from that manager. In fact, I want to empower that manager."

Furthermore, Chris Morrish, managing director of GIC Real Estate, said his experience suggested that LPs involved in decision-making can be a "recipe for disaster".

He said: "It is very difficult to get all the investors together to make the decisions. So we will positively avoid situations where investors are actually making decisions collectively."
Morrish added that it was important for both investors and managers to focus on the term ‘partnership'.

"I come back to the word that is used in all fund documents, but has perhaps not been as prevalent as it might have been in some of these funds. And that is partnership, because at the end of the day the truth is we are all in this together," he said.