In the latest Bayfield Training Webinar, Andri Rabetanety presents: An Introduction to Real Estate Fund Management. Instead of purchasing an income generating building directly, one could alternatively buy the shares of a non-listed collective investment vehicle (i.e. fund). This information-packed webinar provided a broad overview of the fund management process and the fund manager’s role, specifically applicable to real estate funds. The webinar provides an understanding of the risks and rewards of investing in a real estate fund, the challenges of setting up a fund, and the characteristics of modelling the performance of a fund.

Ways to Invest in Real Estate

The first way to access exposure to real estate is through direct investing. As Andri explains, this means buying a stake in a specific property, which can be a single asset or a portfolio of assets. Conversely, indirect investing usually involves purchasing shares in a fund, which then invests on behalf of a consortium of investors.

All property investment products fit into four quadrants derived from two characteristics. The first relates to the nature of capital (e.g. private or public). The second characteristic is the type of asset in the capital stack (e.g. equity or debt). Andri describes that these two broad characteristics can produce four different kinds of combinations. Specifically, private debt (e.g. loans), private equity (e.g. unlisted property funds), public debt (e.g. mortgage debt) and public equity (e.g. REITS). With all these quadrants, investors can create different strategies.

Moreover, as global commercial property markets expand in size and sophistication, investors can select from a wide range of real estate investment products. According to Andri, this is precisely what makes the existence of real estate investment funds more relevant. Specifically, this is because investors can now achieve a mix of property portfolio by targeting a specific allocation of each quadrant, to get different return requirements—for example, 50% private equity and 50% private debt.

Direct versus Indirect Investment

Next, Andri undertakes a comparative evaluation of direct versus indirect investing. First, indirect fund investing has the size (i.e. capital) advantage over direct investing by pooling money together, which allows it to better spread risk through diversification. Second is the nature of ownership. With direct investing, you acquire tangible ownership. Conversely, indirect investing is characterised by a dematerialised form of ownership. Third, liquidity, or the lack thereof, is another differentiator. More specifically, this relates to the easiness of converting real estate into ready cash without affecting its market price. Direct investing carries the disadvantage of illiquidity— the pricing will affect the liquidity premium. In a fund, the liquidity is improved because all you have to do is transfer the shares. The value of shares is calculated based on the net asset value (NAV) of the fund. If the shares are cheaper than the NAV, the fund is said to be trading at a discount to NAV, and vice versa. The last important differentiator relates to the agency problem. In a fund, investors delegate to the fund managers, the activity of asset management in exchange for a management fee. However, Andri explains that a conflict of interest can arise when one party is expected to act in another party’s best interest.

Real Estate Fund Structures

The role of a fund manager is to establish an entity, preferably in a jurisdiction that optimises tax. In this structure, the fund manager will pool together investor money providing professional investment management services for a fee calculated as a percentage of the NAV of a fund. The regulation landscape has increased in complexity. As a consequence, this has created high barriers to entry in the fund management industry. Therefore, one key challenge is to navigate and find the most appropriate structure for your given fund. For example, a close-ended or open-ended fund.

How to choose the right structure?

To conclude, Andri discussed the five key criteria used to decide on the appropriate fund structure. The first criteria are investor demand related to fundraising. The goal here is to find the risk-return profile of investors (e.g. institutional and pension funds), what they want, and where they are based. The second factor relates to the asset market— what type of opportunities are available—for example, core strategy, value-add, or core-plus. The third criterion is deciding on a fund management structure, including the cost structure and fees that will be charged. The two final factors are more aligned to the operational side of fund management. More specifically, this relates to optimising the tax structure and being aware of the regulatory requirements for fund management.