1. How is property multi-manager investing defined?
It’s a misconception that property multi-manager investing is simply allocating money to third-party managed funds. While commingled funds can be a part of the investments, there are also other opportunities, such as separate accounts and tailored solutions, including off-market transactions such as joint ventures, club deals or investment in secondaries.
- What are the merits of primaries versus secondaries?
With primaries, one is identifying the opportunity first-hand and then finding the best way to exploit it – usually, but not always, through the subscription for units in an underlying fund. During start-up, there will be a significant J-curve (a lag effect as the fund will incur expenses, such as property acquisition costs and fees in advance of any revenues).
Increasingly, investors want an early exit for strategic or regulatory reasons. The secondaries market – the purchase of units in existing property funds – meets this need and has been growing, particularly in Europe. As sellers want to exit, buyers usually have the upper hand, especially if they’re able to take on a portfolio of property funds. On top of that, buyers are coming in when the underlying fund is already maturing and income-producing. Therefore, there is no J-curve to worry about.
- What kind of secondaries investments are favorable right now?
It’s helpful to review secondaries investments through the networks of the manager. These networks often include brokers, managers, investors, placement agents and the trade press. Opportunities can also be sourced from any existing primaries investments. This last point is important because secondaries opportunities are often best underwritten and executed by existing investors, who already know the assets and the manager.
Investments that are stabilized and have most of the value-add work completed are favorable. Consequently, the average risk profile is relatively low. Properties should be liquid with a strong cash-flow profile, located in relatively liquid markets. It’s important to stay cautious on hard-to-price risks, such as developments, lower-quality assets and assets in illiquid markets and segments.
- What drives the supply of property fund secondaries?
Property is an illiquid asset class and especially so in closed-end funds. The only way for limited partners (LPs) to sell their investments in closed-end property funds is through the secondaries market. Usually, property fund investments last up to 10 years, and in that time LPs’ motivations for holding an investment can change. These are frequently not driven by the economics of the investment itself.
One interesting driver is regulations such as Solvency II and Basel III, which reduce the appeal of unlisted property funds to insurance companies and banks. Pension reforms are forcing pension funds to consolidate, thus leading to rationalization of portfolios. This trend is particularly clear in the Netherlands, with the likes of APG bolting on smaller pension funds. This also seems to be the case in the UK, where local government pension plans are being forced to consolidate into pools, resulting in a large number of small investments that are time-consuming to manage. As the secondaries market deepens, it has become a useful platform for both LPs and general partners (GPs) when managing their portfolios.
- How will the recent Brexit vote and the upcoming 2017 European elections affect supply and demand for secondaries?
The attractive pricing that can be accessed in the secondaries market, often at a discount to the net asset value, is driven by its inherent inefficiency. This is magnified during times of general market uncertainty. Immediately after the Brexit vote in June 2016, there wasn’t a single buyer in the secondaries market for the most well-known property funds in the IPD (Investment Property Databank) UK Property Funds Index.
At the same time, there were sellers in approximately 20 of these same funds. The lack of buyers highlights the fact that this market is not very deep, and as a result, makes it an attractive place to deploy capital during times of uncertainty provided investors are able to underwrite the underlying markets and properties with confidence and conviction.
With European elections approaching this year in France, the Netherlands and Germany, there could be further uncertainty producing opportunities in the secondaries market.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries.
The investments discussed herein may not be available or suitable for all investors unless the investor meets certain regulatory eligibility requirements.