The picture for real estate funds is very different to 10 years ago, and it"s a sector still undergoing a transformation, as Orlando Crowcroft discovers
There was a time following the financial crisis when real estate funds were largely shunned by investors, plenty of whom had had their fingers burned when the crash revealed that many of their assets were either bad, heavily leveraged or both.
But with the UK property market performing as it has been over the past 12 months, real estate funds are back on the radar for international investors. The global market in 2014 was booming, with transaction volumes clocking in at over $700bn - up between 15 and 20 per cent on a year earlier and with similar results slated for 2015.
Figures released by the European Public Real Estate Association in March 2014 revealed that assets under management of real estate securities funds in the EU grew 68 per cent to $250bn from 2007 to 2012, and the number of real estate securities funds increased 39 per cent to 677 in the same period.
“The main theme in property now is what we call "bond refugees". It"s been hard to get a solid return on fixed income relative to years past, and real estate has offered pretty good value opportunity in most cases,” says James Walton, Head of Real Estate at Canaccord Genuity Wealth Management in London.
Jersey has traditionally had a greater exposure to real estate than Guernsey through the popularity of Jersey Property Unit Trusts (JPUTs). Guernsey has been better known for private equity funds with access to real estate often through London Stock Exchange listed funds in the form of Real Estate Investment Trusts (REITs), an onshore fund designed for investing in real estate.
As a result of a massive interest, not only on the part of individual investors overseas but huge institutional clients such as Middle Eastern sovereign wealth funds and US and Canadian pension funds, investing in UK property through Jersey-domiciled funds is an incredibly attractive option, according to Jon Barratt, Director of Elian Real Estate in Jersey. These investors have a huge amount of cash regularly coming in and need a reliable place to invest it.
“It"s a safe, pure, well-governed jurisdiction where they feel comfortable,” Barratt says. “There"s a continual demand for quality assets and that"s driven by demand for UK property.”
Changing landscape
Unsurprisingly, this pre-eminence of Jersey is disputed by fund practitioners across the water in Guernsey, who argue that while Jersey has had its JPUT structure far longer than Guernsey, the latter is far better known as a general fund jurisdiction.
As real estate funds move from being straight blind pool funds, where investors park their money and wait for the return, to more active property management companies, Guernsey is poised to take a bigger share of the market, they argue.
“The regulatory changes in the last few years in the investment funds market are driving real estate businesses away from being fund managers and towards being real estate company managers,” says Joe Truelove, Head of Fund Services at Carey Group.
What"s more, it"s hard to know whether one island is performing better than the other - the information isn"t public and statistics can be misleading whether for company incorporations, numbers of funds launched or values of asset under administration, according to Truelove.
“The GPUT is the less-well-publicised cousin of the JPUT but works equally well, and with Guernsey"s simpler and more flexible investment fund regime, it"s probably a better option for real estate fund managers,” he adds.
Inter-island competition notwithstanding, there certainly seems to be enough business to go around right now, with new funds cropping up in a range of different sectors. Traditionally, the major focus has been in UK commercial property, but equally it"s been a victim of its own success - as the money piles in, yields on London commercial property are falling, and so fund managers are looking elsewhere.
“People are now looking to get out of London, so the south east is seeing new buyers come in. And then the other two sectors have been student accommodation and the private rented sector,” explains Philip Hendy, Director, Real Estate Services at JTC Group.
While the private rented sector (PRS) remains "a drop in the ocean" in the total number of funds, it"s proving more popular as house prices rise in the UK. Generally comprising large developments or new projects of hundreds of flats, many firms either see PRS as a solid investment at a time when house prices are rising beyond the income of many people in Britain, or even as a boon to a firm"s corporate social responsibility (CSR).
“I think because some of the big funds think that CSR is something that they need to do - whether that"s driven by economic circumstances or the greater good of man - we"ve seen a number of the bigger funds start to invest in bigger social projects,” says Hendy.
But other areas are popular too, explains Barratt, as fund managers aim to differentiate their products at a time when the UK commercial property fund space is undoubtedly saturated. These include regional business parks and logistic hubs for major retailers, such as Amazon and John Lewis, which guarantee steady returns and good tenant covenants as consumers choose to shop online more and more.
“We"re also seeing more opportunistic funds, as managers try to generate a greater return than the central London office market. There may be an extra bit of risk in there, be it development assets, land or even distressed assets that banks are letting go of,” he says.
Experts unanimously feel that the funds sector in the islands looks set only to grow, even with political and economic uncertainty growing in the Middle East and the rest of Asia. If anything, issues such as Russia and the instability in Iraq and Syria only further persuades wealthy investors that the time is right to dive into the UK - and they will inevitably use the Channel Islands to do so.
“With interest rates remaining at historic lows, real estate continues to be a popular asset class for deriving income, while political uncertainty in Russia and the Middle East is making UK real estate in particular a safe haven for foreign owners,” says Truelove.
From hero to zero: is the era of the fund manager over?
In the years leading up to the financial crisis, the successful real estate fund manager - like his or her hedge fund colleague - was undoubtedly king, with the most successful managers becoming celebrities in their own right and their funds massively oversubscribed.
Fast-forward a decade and that scenario has turned on its head. Since the crash, overseas investors have opted to be far more involved in the investment strategy of their funds, wanting to know exactly what their manager is buying and why.
In some cases, groups of investors have done away with the middleman altogether, choosing to operate funds as "club deals" where they themselves decide where and when to invest on a deal-by-deal basis.
“The industry has moved away from blind pool structures, where investors don"t know what assets are in there, towards investors wanting to know exactly what assets are in the fund. They want to understand it more - they want to be able to touch and feel it,” says Jon Barratt, Director of Elian Real Estate in Jersey.
There have been a number of consequences of this trend, notably that funds across the board have got substantially smaller. If a fund has invested $1.5bn over the past five years, it will now appear in the top 40 funds globally. Five years ago, the top funds would have been worth over $50bn each, their coffers buoyed by the huge investment banks - Lehman Brothers, Morgan Stanley and Goldman Sachs.
“That comes from investors wanting to know exactly what"s there. Asset managers are launching smaller funds to get investors comfortable to go into them,” Barratt says.
It"s a sentiment echoed by Philip Hendy, Director, Real Estate Services at JTC in Jersey. “Sovereign wealth funds and large investors prefer to do what they want to do with whom they want to do it rather than doing it through funds,” he says.
But it"s not all bad news. Major institutional investors from the US and Canada still prefer to put their trust in managers, although there has been a significant flight to quality names and quality managers, Hendy concludes.