Towers Watson has turned positive about the strategic case for ‘opportunistic’ real estate investing, as part of a diversified long-term real estate strategy, but warns the associated fees for many vehicles are too high. In research released today the firm reiterates the need to change certain practices in the real estate industry around terms and fees, notably from so-called private equity-style real estate funds Includes ‘value-add’, ‘opportunity’ and ‘opportunistic’ funds..
“For the first time in a number of years we are positive about new investment opportunities in real estate, notably those being offered by certain specialist fund managers, says Douglas Crawshaw, senior investment consultant at Towers Watson.. Some private equity-style real estate funds appear well placed to take advantage of continued dislocations in property markets. However, we believe it is important to negotiate fees on a ‘fund-by-fund’ basis to challenge the status quo.”
In the research, Towers Watson outlines some of the main issues around fees and terms and suggests changes that would produce a fairer deal for investors. The firm points out that while the issues are specific to ‘value-add’, ‘opportunity’ and ‘opportunistic’ strategies, they are applicable to all real estate vehicles.
The research, entitled Fees in real estate, reveals that many of the real estate funds it researches are structured along the lines of private equity-type vehicles with fee scales to match. Some of the features of these fee scales include:
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Fees based on commitments rather than invested capital*
Fees based on gross asset value rather than net asset value*
High management fees of 1-2%
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Preferred returns of around 8% although sometimes higher*
Carried interest of 20%
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‘Catch-up’, where the manager takes a proportion of the fund returns (over and above the preferred return) until it receives its target profit share. This may be taken before the investor receives any of its share of the profit or be phased over time*
Additional fees and charges for example, transaction, development or financing fees and fund expenses*
Deal by deal payment of performance fees (with capital invested in individual assets returned) as opposed to prioritising the return of all capital first.
In the paper, the firm addresses these features and suggests changes that would redress the imbalances around terms and fees, which it observes are currently tipped in favour of the investment managers.
To access Fees in real estate please click here.
D.C.