Investors demand more control as fund raising total dips in first half of 2012, reports Jane Roberts
It won’t be surprising news to investors or fund managers, but raising new discretionary capital remains very difficult, especially for blind-pool funds, but also for existing, open-ended vehicles. By Real Estate Capital’s reckoning, £4.3bn of fresh money has been raised for pan- European or single European country funds in the first half of 2012, by 23 different fund managers, for 26 funds (see table). AXA REIM and Nordic specialist Niam are the only two managers, so far, to raise money for more than one vehicle.
The £4.3bn total includes capital raised in 2012 to get seven funds over the line to final closings: AXA’s pan-European, opportunis-tic development fund; Zug-based Corestate’s Commercial Property Fund, mainly targeting value-added German assets; F&C REIT’s follow-on French offices fund, FOSCA, which took over two years to reach final closing; Hines’s Russia and Poland fund; the largest, at €719m, regional specialist Niam’s Nordic opportunistic vehicle; Tristan Capital Partners’ core-plus, pan-European fund, which raised more than €400m in only about nine months; and Orchard Street Investment Management’s second UK value fund, with Singaporean investor GIC.
The £4.3bn total is an underestimate in terms of all new money coming in, as it doesn’t capture much of the new net capital that will have come into open-ended funds, although, in the UK at least, that appears to be slowing down this year (see AREF figures). It also doesn’t capture new capital allocated to fund managers as segregated mandates or managed joint ventures/clubs, which Indirex, the company set up to host data for property fund managers, believes is also slowing down.
Indirex’s overall figures for new capital raised in the first half of 2012 are lower than Real Estate Capital’s, at an estimated €3.6bn (£2.8bn). Colin Barber, Indirex’s founder, says: “The €3.6bn is less than half the cash raised in the first half of 2011 and only 30% of that raised in the second half of 2011.” The firm’s total for 2011 is €11.5bn.
“The declining trend has worsened through 2012. The first quarter was stronger than the second quarter, accounting for 60% of the cash,” Barber adds. Indirex puts the fall down to a drop in the number of clubs and joint ventures announced this year (see bar chart below). The firm logged €3.1bn of new joint-venture capital in Q3 2011, but only €380m in Q1 2012 and none in Q2 2102.
Trend for tailored investing
However, the trend for investors to seek tailored investing solutions for their real estate allocations with managers seems set to continue. Such investors range from big pension funds and sovereign wealth funds to multi managers, who may be aggregating capital, to wealthy private investors.
This year, for example, Family Office Real Estate Partnership and UBS’s Investment Circle received new money from private wealth for the UK market; the Norwegian sovereign wealth fund set up its third European joint venture; and Schroders multi manager allocated capital to a REIT to invest in convenience retail, rather than in an unlisted fund (see table, p25).
“Large investors don’t want to put money into blind pools and they want control – they effectively want segregated accounts,” says John Humberstone, a partner at Orchard Street Investment Management. “There is a reluctance to sign up to be investor number 37 in ABC LLP Fund 5, where you sign over money for a three or four-year commitment and might get it back in year eight.”
A KPMG survey of investors earlier this year, presented at MIPIM, found that 87% of respondents thought the ability to raise capital for blind pool property funds will remain constrained for a number of years, which “is not a short-term phenomenon”. Some 80% thought club deals and joint ventures would become the main way to get real estate exposure in the next five years.
Managers are less sure that this is a structural rather than a cyclical change. Andrew Friend, Henderson Global Investors’ director of institutional business, says: “Clubs and joint ventures are growing. Some larger investors are more comfortable with direct investing now, whereas seven to 10 years ago they only wanted access to specialist areas through specialist funds.”
That will probably continue for two to three years, but the industry will straighten itself out after a period of rationalisation. Lots of investors still need pooled funds to get access to good quality assets.”
Often the capital looking for a home via single mandates rather than funds is not discretionary. For managers, having an advisory role rather than full control is tough, but the compensation is the high fees paid on successful asset acquisitions,
often 0.5% of value. “You would expect the transaction fee to be higher than a base fee, as it is higher-risk advice,” says one manager. “That’s your starter for 10, because there’s then an asset management fee and maybe even a disposal fee.”
Managers regain confidence
While new discretionary capital raised is down, both Real Estate Capital and Indirex figures suggest confidence among fund managers is rising (see table below). “The confidence of fund managers in the market seems to have taken a significant turn for the better,” says Barber. “Some 37 new fund launches were announced during the first half. This is almost double the total of 19 new announcements logged by Indirex for the whole of 2011,” (see graph, Early announcements versus final closings)
The most striking trend regarding new raising announcements in 2012 is the number of proposed debt funds: 17 of the 37 identified by Real Estate Capital.
Some are follow-on funds to mezzanine debt funds raised in 2010/2011, by managers LaSalle Investment Management, M&G Investments, Longbow Capital and Pramerica Real Estate Investors, and there are likely to be one or two more announced in the coming months.
The “now thing” as one manager puts it, is investing in senior debt, with German and French managers as well as UK firms making up the dozen or so hoping to raise capital for this strategy. “It’s interesting that the real estate debt fund market now offers a range of risk profiles,” says Barber.
Opportunity fund sequels on the cards Another strong theme is the number of private equity real estate fund managers planning to raise follow-on pan-European opportunity funds in the next 12-18 months. These include AREA Property Partners, Catalyst Capital, Frogmore, Orion and Reso-lution Property.
Others that raised their last European funds back in 2008/2009, such as Carlyle Group, Europa Capital and Peakside, are nearing the end of investment periods, while Tristan Capital has said that its next launch after the core-plus Curzon Capital is likely to be an opportunity fund.
These managers have had US investors on their rosters and face competition with North American giants such as Blackstone, Brookfield and Lone Star, which have been raising huge sums of capital from US pension funds and endowments to invest in distressed assets globally, with Europe prominent in their investment strategies.
In the UK, as values slide again, there is a feeling of deja vu. The IPD monthly index fell 2% in the first half of 2012, 0.5% of it in June, and investors sense bargains ahead.
“Heavily discounted assets can potentially offer significant income premiums to investors priced out of London – if they are prudent with asset selection and willing to invest heavily in active management,” said IPD UK managing director Phil Tily when the figures came out in July.
“There are parallels with 2007 and 2008,” says Orchard Street partner Chris Bartram. “I don’t see the market falling out of bed at investment-grade level, because interest rates are so low – but we might be heading there again in the secondary market.”
One or two managers who timed the 2008/09 bounce correctly plan to raise UK value funds, including Threadneedle, which is said to have two funds coming off the drawing board (see news).
Meanwhile, one source of such assets could be the greater number of funds being wound up instead of extended (see table) – there are at least a dozen and more look set to follow.
Redemptions may follow nine-year low for fund inflows
Capital flows into open-ended UK funds were the lowest for nearly nine years in Q1 2012, according to the latest data available from the Association of Real Estate Funds.
New money raised in Q1 2012 among the 63 funds that contribute was £167m, the lowest level since Q3 2003. The majority was from new rather than existing investors. However, because redemptions were also down, to just £61m, the net flow was positive, by £106m (see graph).
With capital values falling – the UK Private Pooled Funds Index Q2 2012 total returns were 0.2%, similar to the direct market – fund managers of open-ended property unit trusts are said to be steeling themselves for redemptions and are holding more assets in cash in readiness.
James Lloyd, a director of Mayfair Capital Investment Management, which runs the open ended Property Income Trust for Charities (PITCH), says: “It has been more difficult this year because people are sitting on their hands a bit. PITCH took in £40m of new money last year but the first six months of 2012 have been quieter. We have taken in something over £15m gross and had around £3.5m of redemptions, so net, the total was £12m.”
Orchard Street scores hat trick of mandates by tuning into BBC’s programme
Good things do come in threes in Orchard Street Investment Management’s experience of the past 12 months. Last August, the six-year-old, UK-focused fund manager was appointed to manage £800m of UK property assets in two funds for wealth manager St James’s Place (SJP).
Then, in April, Singaporean sovereign wealth fund GIC went ahead with an equity commitment of around £100m with Orchard Street for a second ‘Special Situations’ fund, three years after the first. Finally, in June, Towers Watson selected the firm to manage £300m of the BBC pension fund’s UK property portfolio, which is benchmarked against IPD. SJP and the BBC added a third leg to the business that also manages the £1.5bn Railways pension fund, as well as Special Situations. Special Situations is a higher-risk vehicle, with leverage.
As retail money, St James’s Place broadened the sources of capital which Orchard Street invests; it also has great potential to grow. In September the SJP life and pensions UK Property Fund had assets of £626m and the SJP Authorised Property Unit Trust £184m. Since then SJP’s 2,000- strong sales force has bucked the trend by taking in another £100m for property.
“There is no reason why the SJP mandate can’t double in size, if we do the job we are paid to,” says John Humberstone, one of Orchard Street’s six partners He adds: “It’s hard work and a lot of our success now is from relationships even since before 2004, as well as maintaining an outperforming track record every year since we set up then.
“It is great to win new mandates, but we don’t want to take our eye off the ball on performance for existing clients. We won’t take on another new mandate this year.”