Q&A with Barbara Flusk of Citco Fund Services on outsourcing in the real estate sector

Real estate fund managers have lagged behind other asset classes when it comes to outsourcing due to the complexity, hands-on nature and extensive oversight of operations required to manage the $3 trillion and growing industry, according to Citco Fund Services. Due to pressure to control costs and tap into specialized experience among third-party providers, managers are increasingly opting to outsource.

To find out more about this trend, we recently interviewed Barbara Flusk, senior executive vice president of real estate at Citco Fund Services.

Why are managers opting to outsource?

There are several areas that are driving the trend toward outsourcing real estate operations.  These include:

• Emergence of new product types with more complicated and globally integrated ownership and investment structures. This requires expertise that may not be readily available in house.  This invokes the question of whether to buy or build the services internally.
• Buying and maintaining technology is an expensive ongoing proposition. Outsourcing allows fund managers to reduce costs related to operational systems and to focus on creating value for investors with solutions that are more focused on investment and performance.
• Creating scale in operations and reducing headcount. Many fund managers have back office operations in cities where costs are high. Keeping costs down, whether charged to the fund or the manager, is becoming increasingly important with the increased visibility into fund fees and expenses and for hitting corporate profitability targets.

What is the importance of this trend? Why should managers consider this?

The fund administration business is starting to mature in that it is no longer being viewed as an add-on service for basic operational services. It is now becoming an extension of the manager’s business that provides the proficiency and skillset that would be expected within its own operations.  Also, many fund administrators provide ancillary services needed to support real estate funds that help managers to consolidate operations further.

What other trends are you seeing?

We are seeing several trends emerge within real estate fund administration.

Because the trend toward outsourcing real estate operations is on the rise, there has been a flurry of global merger activity in the fund administration space and an increase of fund manager back office lift outs within the past two-plus years.  Additionally, there is increased investment by fund administrators in specialized real estate services.

There is a marked increase in outsourcing activity within the real estate industry across all regions. Those fund managers who previously stayed on the sidelines and watched their peers make the move, are actively pursuing outsourcing alternatives now that there are fund administrators who specialize in the real estate asset class.

Real estate fund administrators have a unique view into best practices across the industry and are making sound contributions to global real estate reporting standards.

What is your outlook for 2018?

Those fund managers who are on the sidelines will take the leap into outsourcing back office operations, although most likely not through a lift out. Also, technology will play a bigger role in which fund administrators are chosen. Fund managers don’t only need systems to support back office operations; they also need business solutions like dashboards and KPIs to support their investment decisions. The ability to provide value-add services that include business solutions will be key differentiators for fund administrators in the future.