Positive Market Changes
The European real estate fund industry is experiencing affirmative changes, as enormous capital volumes are coming in and the sector is receiving gains from the rise of the global economy. Improved confidence in the European market for the last 18 months is evident – the growing share of US and other foreign capital in Europe is verification to that. After the crisis, the marketplace has positively shifted resulting in more involvement in a more thoughtful, risk-aware and transparent portfolio building. Moreover, the increased demand has resulted in a more diverse supply: the interest of investors to enhance in exposure to real estate is encouraging managers to provide varied services, generate new structures and develop new specialist funds.
Fund Managers Have to Satisfy Investors’ Needs
At the present, the market needs cannot be satisfied with a single model – investors demand diversity. The more flexibility, opportunity and variety of methods are brought into the market, the better the supply will meet the demand.
Investors seek good managers who deliver performance, and performance can be delivered in different fund structures. Different product types match different investors, and it is the manager’s task to find and deliver the perfect match. Management expertise, transparency and attention to costs should all co-exist.
Foreign investors can be more demanding: they want more control, access, and participation in decision making in order to ensure the capital is being employed as expected. There are different considerations coming into play, such as diversification, currency exchanges and the will to invest in mature markets. It is not just a returns strategy.
Big or Boutique
Vast international companies are taking a big share of the increased investments, but the market is large, and investors’ demand is varied enough for the prosperous coexistence of large and small businesses, as long as they can deliver the returns. It will be easier for larger fund managers to raise capital and get operational leverage; however boutique specialists, who are focused and get good returns, have a place in the market too.
There is a need of sectors that were niche recently, but have now become conventional, like student housing or residential sectors. It has been one of the major shifts in the last few years, and to manage these assets special expertise is required. The market is developing quickly and multi-managers have already turned into deployers of niche strategies.
Firms of all sizes must have a good relationship between target returns and risk profile. The lessons of the last cycle should be learned: structures that drive to take on more risks should not be chosen.
Smaller firms should be cautious of the risk of becoming a midsized firm, as growth brings a variety of investors and then regulations bind them, making the capital raising complicated and challenging.
In the future, rules will create major entry obstacles and make it even more problematic to run an asset management firm. However, joint ventures can be a solution. Large investors are interested in cooperating with external managers who offer what they do not have in-house. There are advantages to having operating partners and a common model, with the fund controlling exit decisions.
The Importance of Quality Managers
Real estate sector offers great prospects to control the investment and increase the value of the asset, to craft products and change the market. Managers must link interests with expertise, choose the area they are best at and find investors they can work well with. As the real estate fund industry progresses, structures can be accustomed, but managers should stick to what they can deliver, bank on their expertise and never compromise on the basics.
The quality of managers is vital to a prosperous, long-lasting relationship with investors. More supply and demand of good managers is needed, which is a structural issue that will stabilise over time. Real estate funds could incubate some forthcoming managers, and investors would be hugely appreciative of that.
Extend or Finish
Although there is a trend for funds to be renewed, such extensions should be avoided, even if investors agree with them. The best practice is to end them, deliver on the time scale agreed at the beginning and give back the returns. Investors will follow, if they believe a good job has been done and, the agreement rules and what the partnership involves are explained very clearly. There is no other choice to keep a good track record: bring the fund to its natural end, and then start again.
Dynes, N., 2015. European Fund Industry at ‘Sweet Spot’. PropertyEU, 5, pp. 44-45.