Investors and fund of funds managers are most concerned about debt problems for non-listed real estate funds launched in 2006 and 2007, according to a new INREV study.
Results from the INREV Debt Study show that 36% of investors saw 2006 as the most difficult vintage while 35% of fund of funds managers selected 2007.
"If you combine the debt study results with those of the capital raising survey for 2009, you can see that investors have identified that the vintages of funds that are likely to cause most concern are from 2006 and 2007 when peak levels of capital flowed to non-listed real estate vehicles and when the propensity to use debt was high," said Russell Chaplin, co-chair of the INREV Research Committee and Global Strategist for UBS Asset Management.
The study revealed high levels of concern about debt issues in non-listed property funds. At 53%, the majority of fund of funds managers were "very concerned" about funds breaching their covenants while 40% of investors were "very concerned" and 48% were "concerned".
In light of the problems, the study shows that investors have been reluctant to commit fresh equity to existing non-listed real estate funds. One third of investors and half of fund of funds managers who had been asked to commit fresh equity had turned down that request.
Around one fifth of investors had committed new equity to existing funds while just 13% of fund of funds had fulfilled a similar request, although this type of vehicle also has to seek its own investor approval.
"One of the main issues surrounding capital calls, such as those for additional commitments, is the high level of reporting requirements from investors for this sort of request. Investors want to ensure they have a good understanding of what the money will be used for and in these market conditions such a decision cannot be made lightly," said Lisette van Doorn, Chief Executive of INREV.
However, investors were positive on the availability of debt in the market with 72% saying that debt was available, although it has become more expensive. Fund of funds managers were more pessimistic with the largest proportion at 40% reporting that debt was generally not available.
In addition, results of the Capital Raising Survey 2009 show that refinancing will be a major issue for the industry with one fifth of funds facing some refinancing over the next 12 months.
The average duration for financial commitments has fallen to five years from 6.6 years in last year's survey. At 42%, a high proportion of funds have an average duration of four years or less with 6% and 8% respectively having one or two years duration, again highlighting refinancing issues.