Chapter 10 - Offshore Real Estate Funds Flashcards
What is a real estate fund
Invest in real estate assets - invest in:
Existing for income
Development of properties (existing or new) for capital growth
Combination of both
Categories of real estate assets include: Residential property Commercial office space Commercial retail space Commercial warehouses Care homes Student accommodation Real estate derivatives - synthetic real estate
Real estate fund provides a mechanism for those wanting to invest into RE to be connected with projects needing funding
5 possible investment objectives for RE fund
Construction of assets
Fund manager’s may team up with architects and developers with a view to build. Project from scratch - investors with a long term investment horizon as returns will not be achieved until completion of the construction stage
Purchase of existing assets
Property can be bought at different stages such as:
Land with planning permission (expectation is to construct asset)
Partially constructed asset
As a constructed asset
Improvement or renovations
Purchase of existing property may make sense where there is potential for re-development or improvement (sub dividing property into flats, renovating existing property) - can potentially let out or sell for capital gain once renovated
Rental
Various rental market available commercial (warehousing, retail and offices), student accommodation, residential (high end of even affordable housing)
Management
Different types of property require different skill sets - new markets develop and regulatory requirements - experienced managers become in high demand - i.e. Development of student accommodation market more recently
Challenges faced by RE funds
Supply and demand
For the investment to be compelling the manager needs to be badly to demonstrate that there is a demand for the type of RE being pursued and that suitable properties are available in the market
Price and pricing
Property needs to be purchased at an attractive price - allow sufficient margin for profits to be made. Can be quite competitive market and therefore can be hard. Valuations for property need to be obtained for NAV purposes and for the purposes of benchmarking for pricing when selling onward
Grade/ quality
Manager needs to ensure that the expected grade is met - meet requirements of target market. Restrictions in fund docs likely to ensure this is met
Availability of financing
If sufficient capital has not been secured - are banks lending are interest rates favourable etc
Unpredictability
Many factors that can be outside manager’s control such as tenant defaults, inability to find tenants or buyers (competitive market), cost of financing, inability to secure financing, natural disasters, black swan events (that affect the market), construction delays or related parties going bust
Role of the property manager
Many real estate funds will appoint a property manager who will be responsible for managing those assets
Manager selected based on their experience and expertise in the relevant market and contacts within the industry
Role will vary depending on the asset but will involve the up keep of the physical asset, sourcing and retention of tenants and management of other property related maintenance i.e. Cleaning etc
Scope of the property managers role will be detailed in the property management agreement as will their fees
Property managers obligations are to provide manager with regular reporting in relation to the property (highlighting occupancy rates, tenant defaults and any general issues) and to market available units in order to maintain occupancy rates
Property manager may be able to provide property valuations
Real estate derivatives
Also known as synthetic real estate
Derivative will be linked to an underlying index or benchmark - their movement will track the movements of the underlying index or benchmark
Often linked to the Investment Property Databank Index - performance of the fund will track the performance of the index
Most common types are
Property index notes
Total return swaps
Forwards/ futures
Role of investment manager in a real estate fund
Main role of the manager is to maximise the yields and returns of the fund within the agreed levels
Monitor performance of the fund to ensure that it is acceptable
How to assess performance of investment manager in RE funds
Difficult to assess performance of manager as it is hard to value the underlying assets
Even when values are available it may be difficult to strip good performance due to general market conditions rather than sound investment decisions
Other performance measures in addition to financial return should be considered. For example
Philosophy - Trends move - investment manager should be able to demonstrate sound philosophy, focusing on stringent requirement to asses advisor’s integrity and soundness. Close scrutiny of the investment philosophy can explain investment decisions taken over time
Process - evaluation of process can be an indicator of manager’s deviation from the general team process - manager should a,say operate within the terms of the management agreement
People - monitoring hires and quality of people, people are closely linked to the performance - great results may have simply been driven by a great team
Administrators role in RE funds
Demonstrate they have a fair understanding real estate matters themselves to assist with the monitoring of the fund, for example being able o identify when the manager needs to be challenged
Key duties linked to RE admin include
Assisting in the papering of key events - while professionals such as layers etc will be involved admin will be expected to assist signatories in coordinating documents and the flow of paper work to support deal completion and minimise any possible delays
Transferring or receiving funds - cash management, ensuring payments are made on time and in accordance with relevant terms and ensuring that funds due are received
Accounting for the valuation of real estate assets - ensure valuations received and accounted for in the fund’s books - key for NAV calculation, particularly as these will usually be sourced from externally
