Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011
Unlisted property funds
Andrew Baum and David Hartzell, Global Property Investment, 2011
What are unlisted funds?
• Core funds– UK property unit trusts, US/Germany open-ended funds – FCP (Lux), Spezialfonds (Germany)
• Private equity real estate funds– Usually limited partnerships– ‘Opportunity funds’
• Closed ended or open ended?• Companies are closed ended• Unit trusts are open ended: manager buys and sells units
Andrew Baum and David Hartzell, Global Property Investment, 2011
Investable universe is US$16.6tr
Africa $84bn
0%Asia
$4,448bn27%
Australasia $323bn
2%
Europe $5,395bn
33%
Latin Amer-ica
$443bn3%
Middle East$384bn
2%
North Amer-ica
$5,505bn 33%
Source: PFR, IMF, Pramerica REI, Chin & Dziewulska, 2009
Andrew Baum and David Hartzell, Global Property Investment, 2011
Unlisted market is $2.2tr, or 14%
Africa $3bn 0.14%
Asia $376bn
17%Australasia
$114bn 5%
Europe $888bn
40%
Latin America$23bn
1%
Middle East$5bn0.22%
North America$809bn
37%
Source: PFR, 2009Listed vehicles account for $2.5tr, or 16%
Andrew Baum and David Hartzell, Global Property Investment, 2011
PFR unlisted fund universe
Regional focus Estimated GAV (US$m) NumberEurope (Ex - UK) 605,611 906Global (pan-region) 454,279 348UK 144,219 367North America 380,625 464Asia 148,417 269Australasia 62,961 110Latin America 20,673 76Africa 7,498 26Middle East 4,238 19TOTAL 1,828,522 2,585
The PFR database covers around 80% of the global marketSource: PFR, November 2010
Andrew Baum and David Hartzell, Global Property Investment, 2011
PFR universe by fund style
Core$696bn
38%
Opportunity$603bn
33%
Value added$530bn
29%
Source: PFR, November 2010
Core/core-plus $696bn, 38% Opportunity/value-added $1,133bn, 62%
Andrew Baum and David Hartzell, Global Property Investment, 2011
Vehicles by style and target region
Europe &
UKGlobal
North Ameri
ca0
50
100
150
200
250
300
350
400
450
Core/core plus Value addedOpportunity
US$bn
Source: PFR, November 2010
Andrew Baum and David Hartzell, Global Property Investment, 2011
Our definition of core and opp
Europe &
UKGlobal
North Ameri
ca0
50
100
150
200
250
300
350
400
450CORE: Core/core plus OPP: Opportunity/value addedUS$bn
Source: PFR, November 2010
Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011
Open-ended dealing
secondary market
buyers
sellers
primary market
(manager)
Andrew Baum and David Hartzell, Global Property Investment, 2011
Unit pricing: the bid-offer spread
• NAV basis– fund net asset value/number of units
• Offer price– the price paid by an investor on entry
• Bid price– the price received by an investor on exit
• Remember: O F F E R is bigger than bid• Mid price
– bid+offer/2
Andrew Baum and David Hartzell, Global Property Investment, 2011
Example: SEPUT unit pricing Q406
• NAV basis– fund net asset value £1,990.10m/number of units 38,165,556 = £52.15
• Offer price– the price paid by an investor on entry– NAV plus 4.75% = £52.15*1.0475 = £54.63
• Bid price– the price received by an investor on exit – Offer less 6.25% = £54.63*0.9375 = £51.21
• Bid-offer spread– = (Offer-Bid)/Offer) = (£54.63-£51.21)/(£54.63) = 6.25%
• Mid price– = (Bid+Offer)/2 = (£54.63+£51.21)/2 = £52.92
Andrew Baum and David Hartzell, Global Property Investment, 2011
Exit routes
• Open ended funds– Redemption of units by manager– Semi-open-ended: lock-ins, then limited redemptions
• Closed ended fund, limited life – Total asset sales (or securitisation) at end of life– Fund life extensions of 1-2 years….…or more
• Closed ended fund, perpetual life– Regular ‘liquidity events’
• Joint venture 50:50 structure– Put and call– Mexican shoot-outs, etc
• What is the manager’s ambition?
– :
Andrew Baum and David Hartzell, Global Property Investment, 2011
CoreFully leased multi-tenant property
Return: 8-10%Leverage: 0-30%
Core-plusStable lease rollModerate NOI
Upside
Return: 11-14%Leverage: 30-50%
Value-addedRepositioning
Moderate redevelopment
Return: 16-19%Leverage: 60-65%
OpportunisticDistressed sellers
Development, significant redevelopment,
financial engineering,emerging sectors
Return: 20%+Leverage: 65-75%+
Risk
Retu
rnInvestment styles
Andrew Baum and David Hartzell, Global Property Investment, 2011
Four common legal structures
Open/closed ended
Listed/unlisted Retail/institutional Main market
Corporate Both Both Both Luxembourg SICAFs, Dutch Bvs/NVs
Partnership Closed Unlisted Institutional US LLP, UK LP, German closed ended
Contractual Both Both Both Luxembourg FCP, German Spezialfonds
Trust Both Unlisted Both UK/CI Property unit trust
Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011
A typical Limited Partnership – fund
GP(manager)
Property manager Assets held on trust by GP
LP agreement
Promoter/placement
agent
Operator/investment manager
(admin, fm)
Asset manager
Asset management
agreement
LPs
Andrew Baum and David Hartzell, Global Property Investment, 2011
02004006008001,0001,2001,400
0100200300400500600
GAV €bn Est GAV €bn NumberNumber
Source: Property Funds Research, June 2010
Europe (inc UK) market growth
Andrew Baum and David Hartzell, Global Property Investment, 2011
Unlisted funds – recent challenges
• Launches slowing• Gearing reducing • Vintage year effect emerging• Debt funds, mezzanine popular • Disastrous performance stories leaking out • Fund extensions• Clubs preferred• Manager distress
– falling fees– fee re-negotiations?– flight to quality
Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011
The case for funds
Andrew Baum and David Hartzell, Global Property Investment, 2011
The case for funds
• Out-sourced management– Specialist management– Motivated management– Aligned management
• Some retained control– Investment committee
• Asset level diversification
Andrew Baum and David Hartzell, Global Property Investment, 2011
Diversification is difficult
0.0
2.5
5.0
7.5
10.0
0 50 100
TE (%)
Number of properties
London offices Shopping centres
Source: IPD, OPC March 2006
Andrew Baum and David Hartzell, Global Property Investment, 2011
Bad funds
• Out-sourced management means no control• LPs argue with GP – no alignment (LPs pays fees, GP receives
them)• LPs argue with LPs – recapitalisation, exit• Management ceases to be specialist• Management not motivated
– hungry shop out of the money• No alignment – performance fees and utility functions
Andrew Baum and David Hartzell, Global Property Investment, 2011
Good funds
• Out-sourced management but advisory mandate• Specialist management stays that way• Motivated management – 50% owner• True alignment – fees cover costs• LPs do not fall out with LPs (one LP!)• GP communicates fully with GP – advisory mandate• Multiple exit options: sale, GP finds new LP(s), GP as buyer of
last resort
Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011
The case against funds
Andrew Baum and David Hartzell, Global Property Investment, 2011
Issues
• Non-alignment (as before)• Secondary market pricing?• Gearing• The J-curve• The drawdown profile
Andrew Baum and David Hartzell, Global Property Investment, 2011
Funds have significant gearing
01020304050607080
Current gearing Target gearing Permitted gearing
Source: Property Funds Research, January 2009
Andrew Baum and David Hartzell, Global Property Investment, 2011
The J curve and geared returns
0
5
10
15
20
25
1 2 3 4 5 6
INREV IPD
Andrew Baum and David Hartzell, Global Property Investment, 2011
The drawdown profile
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 360
10
20
30
40
50
60
70
80
90
£m
Months
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