State Street research has found that fund managers will face further reporting duties created by new industry standards and impending regulation as they look to increase their exposure to real estate as an asset class. The service providers Vision Focus paper entitled Real Estate: New Opportunities for Institutional Investors states these fund managers face greater costs in supplying the information required of them.
According to the research, large fund managers may meet these further demands by scaling up internally, but other fund managers may decide that they cannot afford to operate in these new conditions and opt to outsource to a professional service provider to meet investors increasing demands. Alternatively, they may decide to consolidate with other fund managers to enable efficiencies in meeting clients requirements in the post-crisis real estate fund management environment.
Fund managers are among the institutional investors, including pension funds, insurance companies, and sovereign wealth funds, that are set to increase their exposure to real estate as an asset class, the research found. Real estate remains the largest block of alternative asset allocation for pension funds (source: Towers Watson/FT, Global Alternatives Survey, June 2011). Prime property remains the most attractive to large institutional investors, with opportunities also noted in regions such as Eastern Europe, added State Street in the research.
However, despite this renewed appetite, State Street said investors have learned from experiences during the financial crisis, and are seeking much greater control and flexibility over their real estate exposure. According to the services provider, regulatory changes are fundamentally changing the landscape for real estate investment on the part of both investors and real estate managers.
With this renewed appetite, State Streets research found that investors have become more demanding of real estate managers and are insisting on more accountability. Investors want closer relationships with their fund managers and are requesting increased information both at the outset and during the lifecycle of the fund. The research also reveals that investors are seeking increased transparency on underlying investments and fees. According to State Streets research, the typical length of time between invitation and closing has nearly doubled since 2007 as investors take longer to make a final decision and pay greater attention to due diligence.
Reflecting a greater focus on risk management, the study found that real estate investors are seeking to play an active role demanding independence on the boards and representation on investment committees of the funds in which they participate. In addition, standard periodic reporting is not always sufficient to satisfy their requirements for improved insight into the fund and the performance of underlying assets in which they are invested.
Simon Burgess, vice president of real estate fund services for State Streets Global Services business in Europe, Middle East and Africa, commented on the research findings: The real estate sector is responding to the imperatives of increasing regulation and rigorous reporting with a renewed sense of innovation. Property fund managers are coming together and we are also seeing our clients outsource more to our specialist real estate teams. We believe that with third-party service providers at their side to provide the local execution and property expertise that is fundamental to investing in bricks and mortar, those real estate fund mangers with global ambitions and those with niche, local market knowledge have significant opportunities, especially at this time in the economic cycle.
(JDC)