INREV: Non-listed real estate funds adjust to a world without easy debt (EUR)

Almost 90% of investors in non-listed real estate funds are concerned that the funds they are invested in are likely to breach loan covenants, according to a study from INREV.

The INREV Debt Study showed that 88% of investors and 85% of fund of funds managers expressed high levels of concern over potential breaches in their funds.

At 53%, a higher proportion of fund of funds managers indicated they were very concerned, compared to 40% of investors. This may be explained by more funds of funds adopting higher risk/return strategies, which have the potential to be more susceptible to breaching terms.

"The results clearly show high levels of concerns among investors but fund managers have identified problems and are tackling them. The debt issues highlight the importance of transparent relationships between fund managers and investors as well as with bankers at this time," said Lisette van Doorn, CEO of INREV.

This is backed up by interviews with property bankers which were conducted as part of the study. Bankers said they were generally satisfied to date with the response from fund managers to debt issues. However, some added that they would like to see fund managers show more initiative to highlight or suggest solutions at an earlier stage where issues occur.

In the future they said higher levels of communication between fund managers and banks would be crucial. Bankers said relationship banking would see them lean towards clients they trust as well as those with proven management teams who could display a strong track record of active property management.

In light of the debt 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 van Doorn.

Investor respondents were also asked to rank style by the levels of problems being experienced. In line with expectations, respondents mainly rated opportunity at the top and core at the bottom of most to least problems seen. However, it is interesting to note that one third of investors said they saw the most difficulties in value added funds rather than opportunity funds. This could be partly explained by the popularity of value added funds in the last few years.

By vintage, investors and fund of funds managers are most concerned about debt problems for non-listed real estate funds launched in 2006 and 2007. Around 36% of investors saw 2006 as the most difficult vintage while 35% of fund of funds managers selected 2007.

These two years correspond with the time when capital flows into the non-listed real estate sector were at their peak, suggesting higher levels of pressure to invest. In 2006 and 2007, €14.5 billion was invested in European non-listed real estate according to the INREV Capital Raising Survey.

Respondents all agreed that the non-listed real estate sector will become less reliant on debt in future – 88% of investors and 82% of fund of funds predicted this change.

Source: Madano

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