2018 proved to be a record year in terms of capital raising for non-listed real estate vehicles.
This result follows a trend of steady increases in capital raising for the industry since 2012.
Throughout this period, open-end funds have proven to be one of the most dynamic and attractive forms of product generating a significant portion of capital inflows and capturing several major headlines in the industry press. The increase in popularity of open-end funds from an investor perspective has been driven by challenges encountered in some more established fixed income asset classes. Investors have been forced to seek other sources of stable income to satisfy their needs and, inevitably, real estate has stepped up as a prime candidate. Producing solid, recurring income returns, inflation protection and diversification.
This evolution has seen an expansion of the types of managers promoting such products. Whilst open-end funds were once predominantly the remit of traditional investment managers we now see a range of exciting new products coming to market promoted by new entrants to this field including established PERE houses and leading property developers many of whom are putting a fresh spin on this product format.
Equally, as the attractiveness of open-end real estate continues and new entrants enter this space there is an increased diversity of the nature of assets being acquired and managed by these products. Pre-crisis, the majority of open-end funds held portfolios comprised largely of office buildings. This is no longer the case as we see these funds expanding into various forms of retail, logistics and residential. Indeed, many new offerings on the market are establishing niche plays which are focused exclusively on these more alternative aspects of the market.
Much of the industry conversation in relation to the design of open-end core funds over the last 12 months has focused on pricing mechanisms. However, whilst the manner in which units in these funds are priced for the purposes of subscriptions and redemptions is undoubtedly a very important matter, few managers have cited this as a key consideration of existing and target investors they deal with. Improved investor understanding on this topic would certainly be welcome in the industry so too would formalized best practices in relation to the governance and transparency models that accompany these mechanisms. Thankfully, this appears to be the direction of travel of industry groups.
Fund investment strategy is, unsurprisingly, key. As challenges in capital deployment increase due to increased property market activity managers will come under pressure to demonstrate their ability to find alternative investment targets whilst not falling into the trap of strategic drift.
The European and global regulatory agenda, amongst other factors, has caused the chosen structure and to become a more relevant determinant of their success in capital raising than ever before. The post- AIFMD environment means that intelligently implementing new regulation into a manager’s global operating model is key to ensuring access to capital markets. Overlaying this complex regulatory agenda is the ever-evolving fiscal environment. Establishing and maintaining tax compliant structures is a major focus of all managers currently.
One of the main differentiating factors of an open-end real estate fund versus its close end counterpart is that it provides the investors with a measure of liquidity. The process through which the manager balances the provision of investor liquidity with the inherently illiquid nature of the underlying asset class continues to be a lively talking point. The challenge which the manager must respond to is how to provide liquidity to certain investors whilst not compromising potential for value creation and the interests of all investors collectively.
Investor reporting too is becoming a far more sophisticates and holistic process. Investors KPIs are no longer purely financial and they are keen to be provided with information on a wide range of topics that impact the reputational and financial risk of their investments. Managers are responding to this by developing more integrated reporting systems across their platform which allow them to respond to these demands whilst also, more broadly, utilizing their data in more valuable ways.
Overall, the future for open-end core funds seems bright. However, it is likely that this capital raising will be focused on a small number of market participants and there are clear challenges to face to be amongst the successful few. The pursuit of competitive advantage in this area will inevitably lead to innovation right across the European real estate funds market and should ultimately provide robust investment products capable of producing strong and sustainable investor outcomes.