Invesco Real Estate, INREV, Pramerica, and RREEF get together to discuss the major stress points of pooled funds. Tony Konstant reports.
Moderator: Malcom Frodsham, Founder, Real Estate Strategies, Ltd
Sébastien Daguenet, Associate Director – Client Portfolio Management, Europe, Invesco Real Estate
Lonneke Löwik – INREV Director of Professional Standards
Paul Denis-Jones – Pramerica Head of UK Fund Management
Ulrich Steinmetz, Managing Director, RREEF Investment GmbH
● What is a pooled fund?
According to Lonneke Löwik of INREV (European association for investors in the non-listed real estate vehicles industry) a pooled fund is comprised of the investment assets of three or more entities, under external management. Lonneke notes that this definition is not an industry standard but is found to be most appropriate by INREV.
● What is the purpose of a pooled fund?
Pooled funds evolved to satisfy demand by foreign investors for real estate holdings in countries and markets where these investors lacked the knowledge capital required for direct investment. The external management aspect of a pooled fund allows local experts to fill the knowledge requirement.
Fixed Versus Open-ended
Fixed funds have a specific time duration at which point returns are realized and the fund is closed. Open-ended funds have no fixed duration.
The discussion on which variant is more effective concluded that each serves the need of a particular client. Fixed durations are less flexible and less able to achieve good closeout timing. Open-ended funds are more flexible but rely heavily on the discipline of the managing entity to realize gains when most appropriate.
Listed Pooled Funds
Pooled funds that are listed on open market exchanges, such as REITs, face dilemmas of valuation. REITs are comprised of a number of different real estate assets whose individual valuations may all be different from their aggregate. In addition, these funds face the full weight of the various market distortions that affect all common stock. Lonneke recommended that a prudent investor always remember that the underlying value, the real estate assets must be the primary research point in an investment decision.
What are the factors and characteristics that make pooled funds complicated investment vehicles?
Various questions face managers and investors looking to value pooled funds and several characteristics serve to further complicate the true value of the fund:
○ Do values reflect the real estate?
○ Valuations rely on comparables (backward looking).
○ Is price at sale/liquidation the value or something else?
○ Finding a willing seller to derive a real market value can be difficult.
○ Different standards for valuation exist.
○ Three different analysts will come up with three different valuations of the same fund.
Fees are the major stress point for pooled funds. Fee structures around and during the recent financial crisis were incredibly complex. Fees generally come in two forms, management fees and performance fees, however, variants and sub-variants evolved to a point that investors began to fail to understand their investments at an increasing rate. Funds that survived and have been established since the crisis tend to have relatively simplified structures for their fees.
● Beginning to see investors seeking options higher up the risk curve.
● Less fund managers will be around do to the crisis.
● The era of the mega funds should pass into an era of more customized and diverse fund alternatives.
● Unlisted funds will survive.
Tony Konstant is currently receiving his master of Science in Real Estate at University of San Diego. He is also a guest curator for the MIPIM sustainability and innovation category on behalf of the University of San Diego, Burnham-Moores Centre for Real Estate.