After a year of internal reviews and discussions with clients, managers expect to raise 86% more capital in 2010 than they did last year, as Shetal Patel reports
A first examination of the capital raising figures from INREV's annual survey shows that it has been a challenging year for the non-listed property funds market. Fund managers raised €5.9bn in 2009, which is a decrease of 60% on 2008.
However, what the figures do not show is that behind the scenes fund managers are preparing the groundwork to launch funds that are in line with investors' changed needs following the downturn. Fund managers and investors have been engaging in high levels of due diligence for new funds and we expect to see the fruits of that in 2010.
The low level of capital raised will not come as a surprise to many. The figure for 2009 meets the expectations of fund managers at the start of that year.
The INREV Capital Raising Survey 2010 shows that there is a less risk averse approach to investments. Core funds represented 87% of the capital raised in 2009; this was mainly at the expense of opportunity funds which raised only 4%. However this could be due to the higher risk associated with opportunity funds as well as the lack of debt that is available in the market at the moment for these types of products. Gearing levels are expected to come down further this year to 47% in comparison to close to 50% in 2009. This reflects the findings of the INREV Investment Intentions Survey 2010 which shows that both investors and fund managers are favouring investments in core real estate with lower levels of gearing.
Another explanation as to why less capital has been raised is that last year both fund managers and investors spent more time reflecting on their business and investments, as well as on their relationships with one another. Fund managers are dealing with more information requests from their investors, with a stricter due diligence process and alignment of interest of all parties involved becoming much more important. Investors increasingly focus on the track record and expertise of fund managers, which also shows in the results of the survey where 64% of the capital raised in 2009 was from repeat investors. When comparing the number of repeat investors in funds over 2006-09 the results show that during 2006 and 2007 the majority of investment was raised from first-time investors. The majority of capital in the last two years has been raised from repeat investors. This demonstrates that investors are more comfortable investing with fund managers they have previously worked with.
It is interesting to see that of the single-country funds that raised capital in 2009, 83% were from domestic investors, which indicates that investors are retreating back to the markets they are most familiar with. Investors seem to concentrate on fund issues in their home markets. This may explain why in 2008 the US and Canada were the largest source of capital at 21% but by 2009 had dropped to 0.1%.
The survey showed that although there was less capital called in 2009 compared with 2008, €0.3bn more capital was called in than raised. This was the first time over the six-year period that INREV is conducting this study that more capital was called in than raised. This indicated that there is still some underlying market activity with capital put to work or called in to support underperforming funds. Across the study period of 2004-09 the ratio of uncalled capital is 26%. The majority of market activity that occurred in 2009 focused on core products. Not only did this fund style raise the most capital but it also contributed to 90% of the total capital called in during 2009.
Pension funds continued to dominate as the major source (52%) of capital into the non-listed real estate sector. It is interesting to see that sovereign wealth funds, though few in number, are now also making a significant impact on the sector, with 11% of capital being sourced by this group in 2009, an increase of 8% on 2008. Investors that invest in non-listed funds are making smaller commitments. Of the capital raised in 2009, 94% of the capital came from commitments of €5m or less.
In 2009, the UK is again the most preferred location for capital raised, with 24%, and the Netherlands is in second place on 20%. Regarding sector allocation it is expected that 31% of capital will be allocated to offices and 30% to retail. Not surprisingly the top sector/location combinations are UK office and UK retail.
Although 2009 was a low point in the market the outlook from fund managers for the coming year is more positive. Fund managers estimate that they will raise €10.9bn in 2010, an increase of 86% on 2009. The survey shows that 74% of fund managers expect to raise capital in 2010 compared with 21% last year. Of those that expect to raise capital 83% intend to raise more capital than they did in 2009.
This optimism is further highlighted by the planned style allocation for 2010 with a higher focus on value-added products for this year. Of the funds expecting to raise capital 52% of the allocation is expected for core funds, 35% towards value added and 13% opportunity, showing that a slightly higher-risk approach may be on the cards for some investors and fund managers for the year to come.
In contrast the 2010 INREV Investment Intentions Survey highlighted that both fund managers and investors thought that the ability to raise capital in 2010 would be the greatest obstacle for the year. There is still uncertainty and the challenge of capital raising still remains on the minds of both investors and fund managers but a more optimistic view for the year to come may be a sign that the property sector is on the road to recovery.
Shetal Patel is a research analyst at INREV