Non-listed real estate investment weathered the recent financial crisis no worse than the other real estate investments, according to a new report from INREV. What has changed is that many larger investors are now increasingly using their financial firepower to influence the shape of the fund management industry to better meet their more demanding requirements and longer-term outlook.
"Our research demonstrates that on a like-for-like, ungeared basis non-listed real estate has performed on par with other real estate investments, accepting the overall weak performance of the sector," said Lonneke Löwik, INREV, Director Research and Market Information. "Many of the reasons that make non-listed an attractive investment have endured, but the industry has changed with investors demanding deeper due diligence and a more binding relationship with fund managers than before the crisis. We consider this a natural evolution, not revolution."
Löwik adds, "Analysis indicated that excessive gearing used by a minority of funds, brought down returns and industry into disrepute, but it is unfair to stigmatize the wider industry that behaved more rationally."
The report finds that there has been a break down in trust not only between fund managers and investors, but to some extent across the entire investment fund universe. This is principally due to the false impression of liquidity which drew in shorter horizon investors whose objectives differed significantly from long term investors during the crisis. It has led to closer alignment of interest between fund managers and investors, manifested in changes to management and performance fee structures with more insistence on continuity of personnel and co-investment, and a much greater emphasis on rewarding value realized over the longer term, rather than notional value in the short term. However, many are seeking more homogenous investor pools.
"Large institutional investors will increasingly seek to partner fund managers in creating new products as a means of underwriting strategy and ensuring alignment of interest," commented Matthias Thomas, CEO INREV.
"As investors seek greater control and more accountability, fund managers are paying the price for the failure of a few who did not exercise their fiduciary duty during the crisis. While the strong reasons to invest in non-listed real estate proved extremely durable over the crisis, the report shows that investors are much more engaged and demanding fundamental changes in the investment model."