EUROPE - Most European real estate fund of funds (FoF) managers turned their backs on the practice of trading secondary fund interests in 2009, as the number of transactions has dropped from 50 in 2008 to just five deals so far this year.

In the latest survey of its fund of funds membership, the European Association for Investors in Non-listed Real Estate Vehicles (INREV) found that during the first three quarters of 2009 FoF managers made five secondary market deals totalling €75m, which pales in comparison to the €548m of deals made during 2008 and the €2.2bn of transactions made in 2007.

"The slowdown in activity shows that fund of funds managers are choosing to step back from further commitments while the market direction is still unclear," said Lonneke Löwik, director of research and market information at INREV.

"It also reflects that fact that a continued focus for FoF managers in these conditions is to ensure that existing fund investments are on track."

Despite this, INREV said the FoF sector was poised to target opportunities in the nascent real estate secondary market in the future and many were planning to allocate capital specifically to this strategy.

Two-thirds, or 16, of the 30 FoF managers interviewed said the secondary market was now a more important part of their investment strategy.

The main reason given is there is now thought to be the chance to enter funds at "advantageous prices", but other reported drivers included immediate access to locations and sectors, and potential capital growth if purchased units are revalued to the fund's published net asset value.

Yet this reported interest in the secondary market has failed to translate into investments with only 4% of FoF managers completing a trade in the last 12 months.

The vast majority of respondents (96%) said this inactivity was because of their inability to price funds and the underlying assets.

Half of respondents also cited "the stability of fund sponsors" as a barrier to secondary trades, while 39% of FoF managers said they were also worried that single fund managers would be distracted by legacy issues.

"One result of concerns over fund sponsors has been the increased reporting requests for fund managers from investors," said Andrea Carpenter, who has taken on the role of interim chief executive following the departure of Lisette van Doorn to ING. (See earlier IPE story: INREV's van Doorn returns to ING roots)

"In the short-term, this has resulted in increased workloads for fund managers. But there will be a long-term benefit for both sides with improved transparency, particularly on issues pertinent to this market such as risk management and reporting on debt issues," added Carpenter.

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