Real estate is evolving fast as increased global investment opportunities emerge. As the effects of the global financial crisis continue to be felt, both investors and fund managers will need to adjust their approach to capitalise on the opportunities of the new landscape.
Our two Vision reports on the real estate industry draw on our insights into the sector as a leading servicer of real estate assets globally and the findings of our European Real Estate Fund Manager Study 2011. “Real Estate: New Opportunities for Institutional Investors” considers the attraction of real estate to institutional investors, their preferred ways of structuring and managing real estate exposure as well as favoured property strategies in the current market. “Real Estate: A New Model for Fund Managers” looks at how managers can overcome the challenges posed by investors and regulators to establish a new operating model, positioning themselves for the significant opportunities ahead.
How is the institutional real estate investment model evolving?
Investor control and performance reporting have become increasingly important in the wake of the financial crisis, while regulators’ attempts to reduce systemic risk have also altered the real estate investment environment. These changes have led to a greater reliance on third-party providers among fund managers.
What factors are shaping the current environment for real estate investors?
As equities regain some equilibrium, additional allocations to property assets have become timely in order to rebalance portfolios. Property prices in key markets have begun what some real estate analysts believe to be a tentative upswing that may offer scope for capital gain, despite an underlying lack of confidence. In addition, there is evidence of rental growth in locations such as central London, which has had a positive effect on capital values in some instances.
How have investor demands changed?
Investors have become warier when choosing where to invest, taking longer to make a final decision and paying greater attention to due diligence. Once they have invested, investors want increased control and reporting on their real estate investments, as risk management has become an even more significant factor in investors’ thinking. They now request more frequent and detailed analyses from their fund managers. Investors are also scrutinising fees and strategy more closely, and in some cases look to negotiate terms.
What specific regulatory changes are likely to affect the real estate industry?
Regulatory change is set to have a major impact in the coming few years as regulators emphasise issues of investor protection and systemic risk. The Alternative Investment Fund Managers Directive (AIFMD), the European Market Infrastructures Regulation (EMIR) and Solvency II are among the regulatory initiatives that may have significant implications for real estate fund managers. For example, because real estate managers do not normally hold appreciable amounts of cash, they may struggle to find the eligible assets to collateralise their use of derivatives under the current EMIR proposals.
How are real estate fund managers adapting to the new environment?
The added complexity and potential costs resulting from investor demands and new regulatory initiatives are causing fund managers to conduct a wholesale review of their operating models. Some managers are choosing to extend the use of outsourcing within their value chain so that they can focus on their core investment capabilities, and benefit from the efficiencies and expertise of servicing partners.
Which services are fund managers looking to outsource?
While administration services have historically been outsourced, fund managers are now expanding what they outsource as cost pressures and risk management needs have intensified. Managers are increasingly looking to outsource functions such as accounting and reporting — as well as technology to support analytics and reporting — to a third party provider. Flexibility and adaptability are the key qualities they are seeking, as well as technical excellence.
What are the long-term prospects for the industry?
Notwithstanding the imperatives of increasing regulation and rigorous reporting, real estate fund managers are faced with the opportunity to develop their businesses on a worldwide stage to meet investor demand for diverse portfolios. With third-party service providers at their side to provide the local execution that is fundamental to investing in bricks and mortar, those real estate fund managers with global ambitions and those with niche, local market expertise have major potential opportunities, especially at this time in the market cycle.