UK - New research has highlighted the lack of alignment of between institutional investors in UK real estate funds, and prompted debate over the need for independent investor representation.

The report, commissioned by the Association of Real Estate Funds (AREF) and produced by PwC, has revealed widespread concerns about non-alignment of interest between institutional investors in both open-ended and closed-end property funds in the UK.

The study - 'Unlisted funds: Lessons from the crisis' - also found that institutional investors were in favour of more supervision independent of the fund manager, including oversight of key decisions.

Larger investors called for more investor representation, while smaller ones were more interested in establishing independent directors. This finding itself highlighted an emerging divide between the experiences of larger and smaller investors in funds, with the former generally feeling more adequately represented.

Independent representation could take different forms, including the appointment of independent representatives on boards of fund managers, investment committees or committees of investors, or the use of third-party corporate advisers to deal with specific situations.

John Cartwright, chief executive at AREF, said: "Conflicts of interest can inevitably arise between property fund managers and their investors - but they can also arise between different types of investors in the same fund.

"Independent supervision and investor representation are ways of addressing these conflicts."

Speaking at the launch of the report in London, John Forbes, real estate funds partners at PwC, said the research highlighted the fact disputes between fellow investors had often been more heated than disagreements between fund managers and investors.

He pointed to the fact larger investors were indifferent to the appointment of independent representatives - probably because they felt they had adequate influence over fund managers already - while the same could not be said for smaller investors.

Warnings were made, however, during a subsequent panel debate about the limitations of greater independent supervision, including investment committees.

Ian Mason, head of UK property fund management at Schroders, remarked that many of the industry's "seasoned fund managers" had to make some of the most difficult decisions of their careers during the 2008 crisis, and questioned whether investors would be positioned to do so themselves.

Paul Richards, head of European real estate at Mercer, also argued against advisory committees being set up with a view to investors signing off on all investment decisions.

The lack of alignment between institutional investors in open-ended funds was also highlighted by the AREF report, primarily arising between "passive long-term investors and more active, and therefore more volatile, investors".

Richards observed that UK pension funds did not necessarily invest in open-ended real estate funds because they required the liquidity, but rather because they were looking for long-term exposure and were unable to predict when they would need to enter and exit.

The feasibility of hybrid vehicles that combine the benefits of open-ended and closed-end funds was also discussed. Forbes said there was significant product development potential for fund managers in this area.

The report cited developing hybrid funds as one of the main areas of actions for AREF in the future.

"The challenges in the downturn for open-ended funds of maintaining liquidity, and for closed-end funds of raising capital outside the commitment period to meet loan-to-value covenant breaches, may encourage greater interest in hybrid vehicles with some of the characteristics of both," it said.

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