Real Estate Unlisted Funds
Global Market Outlook 2016 – Trends In Real Estate Private Equity
EY’s latest Global Market Outlook highlights the vitality and robustness of the real estate fund industry as it seeks out opportunities in new markets.
Preqin Quarterly Update – Real Estate, Q3 2015
The Prequin Quarterly update provides a snapshot of global unlisted real estate investing activity including:
- Fundraising in Q3 2015
- Funds in Market
- Dry Powder
- Institutional Investors in Private Real Estate
- Fund Performance
- Real Estate Secondaries
Lessons Learnt from Australia: The Return of Financial Engineering – Don’t Repeat the Sins of the Last Cycle
The past 6-9 months has seen a significant change in Australia’s real estate debt markets and, once again, financial engineering on paper looks a tantalising proposition to enhance returns. The purpose of this paper is to highlight the impact of various gearing scenarios on our Australian market forecasts, highlight external risks to the investment environment which could influence the sustainability of gearing, and review recent academic research on the subject. The aim is to provide guidance to the best “risk adjusted” strategy for leverage this cycle and the implications for portfolio construction in Australia.
Is Real Estate Bond-Like?
Peter Shepard, Peter Hobbs, Yang Liu
In the short term, real estate’s stable income flows and smooth valuations give some investors the impression of bond-like behaviour. But analysis with MSCI’s IPD data set and new MSCI analytic tools show that this impression is misleading: the long-run behaviour of the asset class is much more cyclical and growth-sensitive.
The research has significant implications both for asset allocation decisions and risk management. Real estate’s higher yields come with higher systematic risk, while tenant credit and interest rate risk may be secondary. While it is not the free lunch some would hope for, MSCI find evidence that private real estate generates a liquidity premium in most markets around the world, and inefficiencies in international markets still leave large opportunities for diversification globally.
The Misuse of Alpha in Private Equity Real Estate Investments
Kiat Ying Seah, James D. Shilling and Charles Wurtzebach
The authors question whether performance compensation for managers of private equity real estate funds–especially those following value-added or opportunistic strategies targeting higher net total returns–should be based on fund-level performance, which may be affected by the use of leverage, or on asset-level performance independent of leverage risk. Using data collected by the National Council of Real Estate Investment Fiduciaries (NCREIF), the authors show that Jensen’s alpha–a commonly used measure of performance that is leverage-sensitive and therefore at least potentially subject to manipulation through the choice of leverage risk–has generally exceeded asset-level alpha by a wide margin during real estate booms and, conversely, fallen fall short of deal-level alphas when poor market conditions are exacerbated by the return-destroying effects of leverage.
Risk Management: Looking through the Label
IPE Real Estate
Over-reliance on geographic, sector and style labels and an emphasis on volatility of total returns could be misleading investors. Matthew Richardson explains.
The traditional approaches to decision-making in direct real estate could arguably be improved. Two problems in particular are worth noting:
- There is over-reliance on geographic, sector and style labels; such labels, while useful in many ways, can mislead because they fail to capture the true risk of real estate assets;
- Too much emphasis is placed on the volatility of total returns; total returns data mask the marked difference between the volatility of income returns and capital returns.
Better results are obtainable by looking through sector, geographic and style labels at the underlying cash flows, although this is more challenging. The difference in volatility of income returns and capital returns merits far greater attention.
Risk Management: Differences in Class
IPE Real Estate
Despite their different characteristics, new research has found little differentiation between the long-term performance of value-added and opportunistic funds.
Some investors in closed-end real estate private equity funds use fund class labels – core, value-added and opportunistic – to help construct portfolios. Differences in fund risk can derive from investing in different property types, geographies, stages of building life and leverage, as well as the degree of fund focus in these areas and the timing of investment decisions by managers. Therefore, it is not clear how useful broad classifications of fund risk are for portfolio decisions when the variety of investment strategies is so large and their execution by managers is so critical.
Despite the fact that classes of funds differ in investment composition, they show that class has not been a reliable differentiator of performance between value-added and opportunistic funds. In their review of individual fund histories from vintages between 1980 and 2008, average performance does not differ between the two classes. This holds overall, for different periods, and for different metrics of performance. To vet funds, investors should more specifically evaluate fund strategies and management quality.
Unlisted Real Estate Funds
This presentation provides a good introduction to unlisted real estate funds including the rationale, risk-return drivers, performance characteristics, and asset allocation.
An Overview of Fee Structures in Real Estate Funds and Their Implications for Investors
Joseph L. Pagliari, Jr.
This study provides a conceptual framework by which investors can assess the implications of various investment management fees and costs on the net returns of their investments. For ease of discussion, this study will classify investment management fees as belonging to one of two broad categories: base fees and incentive fees. Additionally, this study will consider fees paid to investment managers differently from third-party costs incurred by investment managers in the course of conducting the investment fund’s business. Whereas investment managers may be keenly motivated1 to minimize the latter; the same disciplining market forces are somewhat less keen with regard to the former – the investment management fees may not only sustain the manager’s business platform but they may also provide significant profits. With regard to these investment management fees, investors need to understand both the static effects of such fees on returns and the behavioral effects of such fees – particularly incentive fees – on investment managers’ decision making.
Investing in Unlisted Property Schemes
Australian Securities and Investments Commission (ASIC) has produced a guide on investing in unlisted property schemes. This independent guide can help you:
- Find out about the investment product itself
- Understand the features and risks and ask the right questions.
- Use the benchmark and disclosure principle information in the PDS and other disclosure documents to assess the risks.
- Decide if the investment suits your financial goals and objectives.
Unlisted funds – Lessons from the Crisis – Report for The Association of Real Estate Funds
The last decade has been an unprecedented period of turmoil for the commercial real estate markets. Amidst all this the positive net fund flows seen up until 2007 turned severely negative for a couple of years, then recovered strongly for a year or so, but have now turned neutral again.
Against the backcloth of this turbulence, The Association of Real Estate Funds (AREF) commissioned PwC to undertake research into the behaviour and practices of its member funds to provide an objective account of manager behaviour and to determine whether there are lessons to be learned from the experience.
PWC look at valuation policy and practices for both direct and indirect holdings, redemption policy and practices, communication and transparency, alignment of interests and conflict management, fee structures and their potential influence on behaviour, liquidity and debt management.
How to choose listed or unlisted commercial property
Pooled investments via either listed or unlisted vehicles are the most direct ways to invest in commercial property, but which is better? Well, the unlisted versus listed commercial property trust contest is no cage match where two trusts enter and only one leaves. Instead, the one you pick depends on your circumstances and risk profile. The AFR SmartInvestor puts both forms of real estate investing under the spotlight.
Variations In Structuring ‘‘Whole Fund’’ And ‘‘Deal By Deal’’ Carried Interest Or Promote In Real Estate Funds And Joint Ventures
Nathaniel M. Marrs, Louis D. Hellebusch and Krishnakshi Das
A number of variations in distribution waterfall terms enable managers and investors to tailor the timing of distributions of profits to the particular characteristics of their fund or joint venture, including the fund’s or joint venture’s investment strategy and expected financial performance. In this article, the authors analyse these variations and explore some of the considerations underpinning their use in US funds which can also be applied to Australian funds.