Opposing good corporate governance in private real estate funds is a little like arguing against motherhood and apple pie - it's just not a thing you do. But what are the practical implications of INREV's Corporate Governance Principles and Guidelines launched at the end of last year, for investors, fund managers and the market itself?

Does the industry really need them, when the beauty of the private funds is often their opaqueness to the outside world? Do the guidelines have the potential to tie fund managers up in new layers of bureaucracy?

Three leading figures from INREV, and the market, argue that good corporate governance is extremely relevant for real estate fund managers, bringing with it opportunities for better investment performance, bigger capital inflows, and more constructive working relationships with investors, who will often be with them for many years.

"Real Estate is one of the last great bastions of entrepreneurship and is one of the most opaque markets, particularly with regard to the underlying property, and with respect to the fund vehicles," said Tommy Brown, a member of INREV's Corporate Governance Committee and, until recently, global head of real estate at Deutsche Bank Private Wealth Management.

"Because of the lack of transparency, there has traditionally been a lack of consistency in how fund vehicles have worked. Corporate governance guidelines aren't fixed and vary widely from country to country. They also vary widely between transactions and forms of fund and there's a broad spectrum from highly negotiable institutional vehicles, to broadly distributed deals, or deals for retail investors."

Brown said INREV had grappled with the lack of a system of codified corporate rules in the EU, where there about 35 different codes, many of them voluntary, and had tried to pull together a framework of principles for real estate funds to address common themes across national borders. These are fairness to shareholders, clear accountability by the board and management, and transparent, accurate and timely reporting.

INREV's recently published Investor Intentions Survey 2007 (also profiled in this issue of IPE Real Estate) found that the perception of the application of good corporate governance by private real estate funds is definitely improving with 60% of respondents among investors, fund of fund managers and managers saying standards were strong enough, compared with only 46% two years ago in 2005.

However, roughly a third of the investors surveyed still think that adequate corporate governance can only be found in a few cases.


lasdair Evans, chairman of INREV's Corporate Governance Committee and corporate finance director of Hermes Real Estate in the UK, believes that the adoption of sound governance principles will, in all likelihood, give managers a competitive advantage relative to any laggard peers.

"We want to create a virtuous circle starting with the INREV guidelines, which managers follow by publishing transparent information. This is reviewed by investors, who begin to demand that funds in which they invest measure their governance against the guidelines. More evidence is gathered and we will then have qualitative and quantitative measures of corporate governance relative to the performance of funds. The circle is complete when investors see that the better governed funds are the better performing funds and will want to invest in them." Evans says that now, with the European real estate investment market booming, is the time for fund managers to start applying the INREV guidelines, to try and head off potential problems when the cycle turns down, even though corporate governance is not high on a manager's list of priorities while they are on a roll.

As some of the German open-ended property funds have found to their cost in the past couple of years, it's a bit late to act when corporate governance failures emerge and investors are running for the doors with their money.

Michael Nielsen, managing director of ATP Real Estate and also a board member of INREV, says that managers and investors should not see the association's guidelines as a set of rules and regulations.

"Managers should take out the best parts of the corporate governance principles and guidelines that apply to their particular fund," he explains. "There could be differences in whether you have an opportunistic or core-style fund and whether you are a large manager or a small one."

ATP finds that conflicts of interest and general transparency are the biggest "deal breakers" when it comes to governance and it has rejected a number of funds on this basis in the past. Managers sometimes don't want to give details on particular properties, explain the conditions of the loans they get from banks, or it isn't clear that there has been an open market for assets.

"Sometimes managers' reporting is not very specific and when you ask for further details they don't want to provide them, which makes us wonder why, as it's our money they're dealing with. As a general principle if you don't have anything to hide you should be willing to release it," Nielsen adds.

ATP often finds that smaller management teams tend to come up with better "alignment of interests" packages than the big investment houses, in what is very much a "people business". This can mean having a personal investment in the fund to align the interests of key personnel so they stay onboard for the long term.

"If good corporate governance is clearly in place then it becomes much easier for pension funds' asset liability management people to allocate even more capital to the real estate investment market. I hope investors will really use the INREV guidelines and not just say ‘here they are and please adopt them'. Managers should also adapt the governance principles to funds they're setting up. INREV can't do it themselves, it is up to the participants in the market," Nielsen concluded.

Steve Hays is a founding director of Bellier Financial Marketing based in Amsterdam