During the recent growth phase, the primary concern of fund managers and investors was to pool new vehicles; today, both are faced with the requirement to manage existing portfolios and vehicles. One important lesson learned in fund selection — and an aspect that has gained in significance — is that the structure and composition of the investor base counts. In times of scarce liquidity, limited market growth and shifting fund strategies, investors in a pooled fund may have divergent interests, which become unmistakeable in difficult market conditions. Consequently, an analysis of the investor base is essential before investors decide to commit to long-term, unlisted real estate funds.
From the Current Issue
"Boy, is it tough out there…” This was the response I received from a good friend who was trying to raise capital for an investment with one of the globe’s leading real estate developers. He had been doing the traditional capital-raising journey from Singapore to Abu Dhabi, then to Amsterdam and finally London. But, unlike in previous years, this trip was with little success.
Two years into the steepest downturn in memory, investors are beginning to dip their toes back into the market. Although the first ones to enter the still-churning waters may be viewed as the ultimate risk-takers, the properties they are hunting for are anything but risky. Today’s risk takers have joined the back-to-basics crowd. It’s not the high-flying, high-return opportunistic real estate that is attracting their attention — it’s the prime assets that are being offered at prices not seen in decades.
In real terms — ie, excluding the impact of retail price inflation — commercial rental values in the United Kingdom are now lower than they have been at any point in the 29-year series for which IPD, the Investment Property Databank, provides figures. What’s more, we expect to see further falls in 2010. This is despite the fact that, in real terms, the current downturn started from a much lower base than the last major rental correction in the early 1990s, and in the absence of a “rent bubble”. What is this likely to mean for property performance going forward, and can we draw any parallels between the United Kingdom and continental Europe?
The pace of decline in capital values across Europe is beginning to slow. We still expect another weak 12 months for property market returns, driven by sharp falls in rental levels and further falls in capital values, before the market fully recovers. The United Kingdom has already repriced significantly, with capital values having fallen by some 45 percent since summer 2007, but is now stabilising. Capital values in the euro zone will continue to fall, but at a slower pace. Over the next five years, we expect UK property to outperform, followed by the Nordic region. Prospects for central Europe remain weakest due to sharp economic contraction in that region and the withdrawal of capital by foreign investors.
Those involved in the pricing of European real estate currently face a number of challenges. These include variations in the level and quality of available market evidence, issues relating to the definitional and methodological consistency of valuations produced in different markets, and the challenge of coordinating and standardising valuations of cross-border portfolios appropriately. Perhaps most important, though, is the fundamental lack of comparable transactions in the current market, and the cross-border inconsistencies in pricing that result from this.