TRUST Managers' task of rebuilding trust among investor clients is still a work in progress. Those that do not heed the warning will not be able to raise capital. Richard Lowe reports
Henrik Kolind, head of property investments at Sampension, says that, generally speaking, real estate fund managers have been adequate in terms of reporting, information flow and transparency during the downturn of recent years. He says those operating in Asia Pacific have been good at providing information, which is essential for investors who are based so far geographically from the region.
But he says the big question that remains is why managers continued to invest in the period leading up to the financial crisis when yields were well below their historical averages. Sampension sold out of large direct exposures in London in 2006 and similarly in Denmark in 2007, "because we thought the yields were so low," Kolind says. But the same cannot be said of many fund managers who are invariably unable to take such decisive actions when they are managing the capital of a large number of different investors.
In May 2008, Sampension visited the US to look at opportunities to invest in real estate and spoke to a number of fund managers there. Thankfully, Sampension decided it was not the right time to begin investing in the market, but Kolind says no fund managers warned him against investing at that point in time or warned him to be careful, just months before the financial crisis entered a new low.
He says the biggest question to be answered by managers is why when yields were so low and values so high managers continued to go on "buying and buying" rather than starting to sell. However, he admits it is a difficult question, because "it came as a shock for many managers, like it did for all of us and it is always easier to look back in the mirror and say we could have done a lot of things".
The quality of communication and level of transparency on the part of real estate fund managers during the downturn varied significantly, in the experience of Marian Berneburg, portfolio manager for real estate investments at AeVWL.
"There were those fund managers who were very active, very open in their communication. There were those fund managers who dragged their feet a bit, who were slower on the communications front," he says.
"Generally speaking, the fund managers who were a bit more upfront with the information and put their fingers on what the problems were and communicated those problems came out better overall. They seemed to have taken a more proactive route and that is definitely something we prefer."
Berneburg says the managers that were proactive in their communications and actions have benefited from greater trust on the part of AeVWL and are more likely to see further commitments in the future.
"Managers that were proactive tended to try to solve the problem earlier, because certain solutions could only be put in place with investors' approval or knowledge. By approaching the investors early they had a greater set of solutions at their hands," he explains. "They were able to put alternative solutions in place and that tended to be positive, rather than keeping quiet and hoping that everything would turn out for the best. The downturn was too long to simply pretend that nothing was happening," he explains.
Berneburg agrees that trust is definitely important for investors. "A proactive fund manager approaching the investors early increases the chance for us to make any further investments with them, simply because there is a level of trust there. If we find out, in retrospect, that the problem was existent for quite some time, then we feel deceived to a certain degree."
Claude Angéloz, partner and co-head of real estate at Partners Group, says the downturn has highlighted the importance of trust between investors and managers. Only those managers that have been transparent and worked hard in the interests of their investors will be able to raise capital in the future.
These managers, he says, "have been upfront with their investors, have been transparent about the valuations in their portfolio, and have been able to demonstrate transparently how they work on their portfolios, how they fight for their assets for their investors".
Angéloz says that investors are able "to differentiate between things that went wrong for the industry as a whole - in the sense that the market has just revalued - and they are able to differentiate about things that have gone wrong at the manager's level: not having the right people on the deals, reacting too slowly, over-leveraging of portfolios without having a fall-back plan, and these sort of things."
The "pain and pressure" the real estate investment industry has gone through has highlighted the issues of transparency and communication, according to Angéloz. "It was a healthy exercise for everybody - the GPs, the LPs and the industry as a whole - to take a deep breath and to look at what went wrong but also to confirm that quite a few things were done in the right way. I think a lot of people have drawn their conclusions," he says.
"It has triggered a very painful clean-up process within the GP world, which is still in full swing. We believe it will be for the benefit of the industry going forward. We believe corporate governance of funds will improve, as well as how fees are charged and calculated."
But Angéloz also believes that the downturn has highlighted how investors should never make short cuts when it comes to real estate. "When things go well and the sky is blue investors tend to forget about some of the precautions that you need to take, or they do shortcuts in their due diligence, they make concessions on some of the legal terms, on corporate governance," he says.
Transparency and communication varied between managers;
Would have liked quicker information about falling valuations;
Prefers managers that are not too eager to invest capital.
Christian Böhm, chief executive at APK, says that transparency varied between managers, but on average "was OK". He complains that information of falling valuations was not always delivered as fast as the Austrian pension fund would have liked. "It would have been useful to have the information in a shorter timeframe, to look at the reasons why," he says.
Böhm says he would prefer more information as to why funds performed the way they did during the downturn to help managers to give better projections for the future. In some cases funds have suffered write-downs, but values are expected to recover fairly quickly because the market outlook is strong. For other funds this is not the case and the pension fund has to consider the implications of value being depressed for some time.
But Böhm says that it is important for investors to ask what they want and for them to take the responsibility of checking on their investments. "It is also the duty of the investors to take care of it, to check if they do not have the information they would like to have," he says. "If you have a feeling there will be a change you have to ask - don't just blame the managers."
He adds that trust between investors and managers is "very necessary in such an environment as we are in now." Böhm prefers managers to recommend putting off investing if the time is not yet right, for example. "This is for me a good sign of the relationship between the investor and the real estate manager - to really check the point of time for new investments - because there is no value-added for us if they invest at any time and buying the investments in the portfolio at too high prices," he adds.
Justin O'Connor, chief executive at Cordea Savills, says that it is important for investors to trust their managers. "It's not your own money, it's somebody else's money," he says. "They have to trust you."
O'Connor says open communication and transparency is something that Cordea Savills always seeks to achieve, even during difficult times, such as the recent crisis. "We were very transparent with our investors and told them bad news probably earlier than some other houses did, which initially probably cast us in a worse light," he says. "But having that style of communication has paid off."
O'Connor says that a lot of the bad news was about what Cordea Savills was expecting to happen in the near future, so that investors were given prior warning of falling asset values rather than discovering them retrospectively. He says this was difficult in the short term, because no one likes to be the bearer of bad news - especially when other fund managers were not being so pessimistic, but in the end it had its rewards in the form of investor trust.
The downturn has also highlighted the importance of alignment of interests, and also the deficiencies of existing methods of maintaining it. He says that incentivising fund management teams with carried interest schemes is effective during rising markets, but what was missing from the equation was some kind of "retention mechanism" or "hurt money" that would help prevent individuals from disbanding when it is clear there is no longer scope to earn performance fees.
"Fine, you hurt the entity, but if you've got nothing really tying in the team, the team could walk away," he says. "I think that happened a lot, particularly with the opportunist funds. So I think investors are now saying, ‘well, what are the individuals actually putting in here in terms of their own hurt money, so they'll actually stick around to try to preserve as much of their capital as possible if things go wrong?'"
Feri EuroRating Services
"We have all experienced the downturn and everyone has lost some money or some performance - there is no doubt about that - but investors love managers who communicate directly and transparently and give a true picture about the investments quickly," says Wolfgang Kubatzki, head of real estate at Feri EuroRating Services.
Kubatzki says he can speak on behalf of German, Austrian and Swiss investors when he explains that customer relationship management is very important. "Often managers underestimate the importance of communication, of customer relation services between managers and investors," he says.
He says the approach where managers use their reputation to effectively say, ‘give me your money, and you can hope you get something back', will no longer be accepted by investors. "Investors want to rely on their managers. If someone is very successful on this topic then investors will trust him and will come back by making commitments to new funds," he says.
Fund of funds managers have a dual role of communicating openly and effectively to their investors, while also demanding the same from their underlying fund managers. Kubatzki says it is important that managers can show that they are very close to the fund managers at the level below, but it is also important that they can relay information from underlying funds quickly and analyse all the information for the investor.