As in previous years, the INREV Investment Intentions Survey focuses mainly on the market for European non-listed real estate funds which invest directly in property. However the survey also specifically examines the attitudes of fund of funds managers for the first time. In addition the scope of the survey has been extended to cover the newer asset types and locations starting to enter unlisted portfolios - to help reflect the growing interest in infrastructure investment, for example, and to keep track of the more global nature of the business.

INREV's third annual survey was sent out to all members together with the readership of IPE Real Estate in November. Within INREV 662 individual members were contacted, both institutional investors and fund managers. While the previous two surveys were distributed to INREV members alone, it was decided this year to broaden the coverage by going beyond the INREV membership and circulating the survey questionnaire to IPE Real Estate's readership.

The survey attracted 123 responses, of which 100 were from INREV members, implying a 15% response rate among the organisation's own membership. It was completed by 56 fund manager organisations, 45 institutional investors and 22 fund of funds managers. The respondents were based in 24 different countries.

The 45 institutional investors who participated in the survey have nearly €90bn invested in real estate globally. Nearly half of this is invested in non-listed vehicles. The majority of the investors covered have holdings in 10 or more funds. The investors covered by the survey continued to be very positive about real estate investment in 2007. Far more are intending to increase their allocations than to reduce them. This was true for each of the four routes into property identified in the survey - direct property, listed property funds, unlisted property funds and joint ventures. As in 2006, non-listed vehicles are the most favoured route for increasing real estate exposure. But in contrast to last year's survey, a small group are now expecting to keep constant or decrease their allocation to unlisted property.

More than 40% of investors expect to increase their weight in listed real estate in 2007, possibly reflecting increasing interest in REITs, due to be available for the first time in the UK and Germany, and also the increasing availability of securities funds of funds, which make it easier to access the listed sector. Joint ventures were included as a new category in the survey this year. The institutions expecting to raise their allocations through joint ventures are typically the very largest investors.

A number of factors have underpinned the popularity of unlisted property funds in recent years, but as in 2006 investors' leading motivation for investing in these vehicles is to gain access to expert management. Next in importance are the international diversification benefits they offer, while diversification benefits within the domestic market, easier access compared to direct real estate, and enhanced returns are also significant.

Fund of funds managers, who are now emerging as key players in this marketplace, put more emphasis than others on the possibility of gaining enhanced returns as a result of investing in the unlisted sector. Direct fund managers on the other hand particularly value the easier implementation of investment decisions via indirect as against direct holdings. These results are very similar to those seen last year, when access to expert management and diversification were also considered most important. Other advantages noted for unlisted vehicles are access to larger markets and a shortage of product in investors' own domestic markets.The survey also looks at perceived disadvantages of the unlisted sector. All three types of market player believe the lack of transparency and market information is the most serious cause for concern, as was the case last year. This confirms the importance of INREV's aim to improve vehicles' reporting standards and the quality of information available in the public domain.

Those on the buy side of the business, investors and fund of funds managers, also believe that a lack of suitable products in which to invest is a key negative factor. Managers see this as less of an issue. At the same time, investors are more concerned about the alignment of their interests with fund managers than are managers themselves.

However, both fund managers and fund of fund managers see limited liquidity as a key hindering factor in the unlisted market, whereas it is less of an issue for institutional investors. This may be because fund of funds managers place more emphasis on shorter term tactical investments, and fund of funds structures are more focused on exit strategies, both in closed-ended as well as in open- ended vehicles.

While some market players believe that there are no obstacles to investment, there are still significant concerns about the high costs associated with investing in the unlisted sector. Others worries include internal resource constraints, lack of suitable managers and investors' limited exposure to offerings.

Most investors and fund managers believe that investment consultants' advice is helpful in the investment process - but fund of funds managers see it as having limited value. When it comes to choosing the vehicle to invest in, investors and managers agree that the style of the fund - in terms of core, value added or opportunity characteristics - is the decisive factor. But fund of funds managers see style as less important than the fund manager's presence in the local market. As one would expect, the fund's target location and sector are also key considerations. Legal structures, corporate governance issues and fees are seen as rather less crucial.

Among the various styles of fund, both investors and fund managers prefer value added funds, while fund of funds managers like opportunistic funds best, albeit by a narrow margin. These preferences do not appear to have changed dramatically since 2006. In terms of funds' more detailed strategy and structure, investors seem to prefer multi-country rather than single country funds, and a specialist rather than diversified strategy.

Their wish list also tends to include a closed-ended seeded fund type of structure, with a low level of investor involvement. On balance investors like individual funds as opposed to funds of funds, preferably with a large pool of at least ten investors participating.

The industry appears to be in close agreement on these topics, the only significant differences emerging over funds' sector strategies, where fund managers tend to prefer diversification while fund of funds managers and investors would rather see specialist funds focusing on single sectors. In terms of European performance prospects for 2007, investors currently favour offices as the sector likely to show the strongest returns. This enthusiasm is not completely shared by the other contributors to the survey: fund managers rank office below retail, while fund of funds managers rank European industrials highest in terms of their likely performance.

Office investments have gained in popularity over recent years to become the most favoured sector today. In 2005 and 2006 retails were most popular, and meanwhile industrials have also improved their rating this year, as has the residential sector.

As in last year's survey, Germany is seen as the most promising location in terms of national markets, but confidence in the central and eastern European markets has faded somewhat. On the other hand, the Nordic markets are now gaining popularity, especially among fund of funds managers. A number of new countries were added to the INREV survey this year, including Russia, Ireland, the Baltic states and Switzerland.

Although INREV's remit lies within the European real estate market, the survey included a section on new asset types and locations for the first time for 2007, as investors are increasingly looking towards non-traditional real estate and markets outside Europe. Particular attention is devoted to the infrastructure investments being made by INREV members, as well as planned launches of infrastructure funds. The other main focus is the growth of investment through unlisted vehicles in property markets outside Europe, a trend which looks likely to escalate in the years ahead.

Although interest in infrastructure is undoubtedly growing within the unlisted sector, it is surprising that nearly two-thirds of market players do not consider infrastructure as real estate at all, but rather as a separate asset class. This is true for investors, fund managers, and fund of funds managers alike. But nearly a third of investors (28%) have already invested in infrastructure, and a third think they will be very likely to do so in 2007. Less than half of investors think that they are unlikely to invest in the sector in the coming year. On the other hand most fund of funds managers consider themselves unlikely to invest in infrastructure funds in 2007, probably as a result of their declared investment strategies and the relative novelty of infrastructure funds. On the supply side, 15% of fund managers in this survey currently offer infrastructure funds. In addition 23% of managers are either very likely or likely to launch this type of fund in 2007.

Investors belonging to INREV now have considerable interests beyond the boundaries of Europe, with some 40% of those covered in the report holding indirect assets in the United States. Japan and China are the next most popular locations in terms of current investments.

Outside the US, fund of funds' investments are also tilted towards the Asian region, with Japan, China and India paramount. This reflects the emergence of several Asian funds of funds and the tendency of many European investors to access the Asian market through funds of funds.

In addition Singapore, South Korea, Malaysia and India are all now well and truly on the radar, while Australia is also attracting attention. Future investment intentions and anticipated offerings outside Europe follow a similar pattern to current activity for both investors and managers. The only discrepancy appears to be in the case of China, which ranks third in terms of current investments outside Europe, but comes only seventh in investors' plans for 2007 and 2008. However fund managers see more potential in China and rank it third, after the US and Japan.

In nearly all locations, fund of funds managers look likely to be the most active global players over the next two years. This reflects the fact that several fund of funds managers run either global funds or a portfolio of regional funds, which effectively cover the key global markets included in the INREV survey. Additionally, many funds of funds are still building up their portfolios, making them potentially active investors in the years to come, especially in Japan, Singapore and China.