Listening to the investors
IPE Real Estate spoke to FIVE major European real estate investors about their views on fees and fee structures in real estate markets
The questions we asked
n Do you think the returns you get from unlisted funds, particularly opportunistic funds, justify the fees charged?
n Are you happy to have fees charged on commitments?
n Would you like to see fund managers provide a total expense ratio figure? What other methods could be used to compare fees over different vehicles?
n Do you find many instances of ‘hidden’ fees in addition to the standard management fee? How much does this increase the cost? Is the current level of fee transparency acceptable?
n With separate account mandates; is increased competition between fund managers leading to lower fees?
n Is the level of service you get a more important consideration than the fee level?
n Do you think property brokers offer good value for money?
n What level of fees do you pay/are you asked to pay for acquiring and disposing of buildings?
n Is the level of service you get a more important consideration than the fee level or are you looking for straightforward brokerage, rather than a full advisory service?
PENSIONS RESERVE FUND
Ian Gleeson has a tough task ahead of him. The National Pensions Reserve Fund, which was set up in 2001 to partially pre-fund the Irish state pension, is looking to allocate in excess of 5% of its total assets to international real estate. At present, the fund has €11bn of assets and expects to increase this to €25m within three years. The fund is expecting to build up a substantial portfolio over the next five years. Gleeson has a global mandate – looking primarily at Europe and North America, but will only invest indirectly. He has had considerable experience of this from his days at UK asset manager F&C, where he was responsible for indirect investment. “While we are only recent entrants into the real estate market, we will be ahead of the curve in terms of establishing a large, global indirect real estate portfolio,” says Gleeson. One of the areas he and the NPRF are very keen to scrutinise is that of fees and fee structures.
Gleeson believes investors are starting to regain some ground from fund managers in terms of where the advantage lies. “Investors appear to be getting more organised; INREV is a good forum for investors and managers to come together and discuss matters such as fees in a structured way. In the past, fees were quite aggressive. More investors are getting active and the industry is moving towards fairer fee structures. Where there are limited product ranges available and where managers have a very strong reputation, they can charge higher fees, but no-one minds paying high fees if the rewards are there.”
Another factor in improving the investor’s lot has been increased competition between fund managers. “Since I started in mid-October, I have seen at least 60 introductions for different funds. There are more funds available and more similar funds, which drives down fees.” Gleeson says he has seen fees move downwards from an average of 1.5% of gross assets to 1.25%.
That said, Gleeson asserts that fees are “definitely not the starting point” when making investment decisions but says “if fee levels are advantageous, it will be a plus”. The key is alignment of interest, he says. “No one objects to managers being rewarded in return for good performance.”
Like most investors, Gleeson does not like to see fees charged on commitments. “That can be a real killer,” he says. “If a fund manager is slow to invest and only, say, a quarter of the fund is invested after two years, then investors can be paying 6% in fees, rather than the advertised 1.5% – which could be everything the assets yield. Obviously, at this point the manager should do something about it.”
A total expense ratio - where an estimate of all fees (including those for acquisitions etc) over the life of the fund is given - is something Gleeson would like to see more often. “At the moment it tends to be something you have to work out yourself,” he says. “But it’s something a lot of investors are looking at and I think it will happen. This is all part of a general shift towards greater transparency.”
With regard to ‘hidden fees’, he says: “Investors have a responsibility to carry out full and proper due diligence, but managers need to draw attention to what the full fees are.”
Looking at brokers’ fees, Gleeson says the standard 1% generally offers good value, although on larger deals a flat fee makes more sense. “There is rarely 10 times as much work required on a €100m deal as on a €10m deal, so 10 times the fee is not appropriate.”
While he wants to get value; Gleeson also believes that investors being too parsimonious with fees will not aid the industry. “It is the level of service that is important. If fees, in whatever area, are driven down to almost nothing then the service providers will no longer be able to attract the best people and thus offer the best service. That said, there is still scope for the balance to be redressed in favour of investors.”
The Danish local government pension fund KP has been a long term investor in direct real estate and has been investing indirectly for two years. Recently, KP joined forces with four other Danish pension funds to form the Danish Real Estate Club, a network where the members will join forces to invest up to €250m a year into indirect international real estate.
The club will target indirect real estate vehicles across all industry sectors in Europe. The main focus will be on core and value-added investments but there will also be some appetite for opportunity funds.
Head of real estate Henrik Kolind says: ”Currently our domestic property weighting is too heavy and we are seeking to spread risk through indirect property investment across Europe. The market is growing rapidly and the club model gives us considerable flexibility and power to seize the right opportunities whilst enjoying the benefits of shared resources, knowledge and experience and of course, a reduced cost base.”
At present, KP has a €1bn property portfolio, split 60/40 between domestic and overseas real estate. Around one-third of the overseas investment is indirect.
Kolind says fee transparency is what matters – not the fee level: “We need more transparency in the pooled fund market; at the moment there are lots of different types of fees. This makes it very hard for investors to look through the structures in order to see what you are likely to end up paying and to make like-with-like comparisons. There are so many ways being used to calculate fees. Bodies like INREV are working to make it easier to make these comparisons, and that is a very good thing.”
In the future, Kolind wants to see more standardisation of fee structures and also to see fund managers publishing a total expense ratio as standard, to make those comparisons between funds easier. Publication of a TER will also give investors a more open and straightforward estimation of the costs involved in a fund at the outset.
“There are so many funds coming out at the moment,” says Kolind. “If it becomes too difficult for investors to get a clear idea of the fees involved in a particular fund, they will look to other funds. Transparency is not just a benefit to the investor. By making themselves more transparent, funds can make themselves more competitive.”
Performance fees can be a matter of contention between investor and manager. Kolind would like to see more performance fees at least partially linked to income yield, rather than based on valuations. “It’s better to have performance linked to something concrete – the actual income returned to the investors during the life of the fund, rather than to a value judgement.”
He says that most performance fees are still linked to valuation, but that some newer funds are starting to take notice of investors’ desires in this respect. Similarly, he would like to see management fees linked to rents received, for the same reason. He also adds his name to the increasing list of investors who are not prepared to pay fees on commitments.
Kolind believes fees in the indirect market will move in the same direction as in the direct market, where fees for separate account mandates and brokers’ fees have been driven down and fee transparency increased due to increased competition. “The direct market has obviously been established much longer and is therefore much more competitive- in the future it will be the same in the indirect market.
Jan van de Pol
BLUE SKY GROUP
Blue Sky Group manages the pension funds for Dutch airline KLM, which has three pension funds. The pension funds have a total of €9bn invested, 11% of this has been invested in real estate – around €1bn. All the monies are invested indirectly, in both the listed and private markets in Europe and North America. The funds, which have a long history of real estate investment, do not invest in direct real estate assets and do not invest outside of the those two continents. Jan van de Pol, senior fund manager – real estate at Blue Sky Group, says the pension funds have recently been slightly underweight in real estate due to weak market fundamentals but have begun to increase investment again recently. “In the 1970s we had 20% in real estate, and this decreased over the next 20 years, but we are starting to move back to a bigger allocation, although not of that size.”
Van de Pol says: “Fundamentally fees are not that important to us. Fees is only one of a number of criteria that we consider during the fund selection process. The actual level of fees is not the issue. What we are concerned about is whether the fund manager is offering value for money and does this come through in the fee structure? What is important is that fees should be fair to all parties – not just the investor.
“We could still do with more transparency in the private real estate funds market in order to ensure that investors can make comparisons between funds effectively – at the moment they are not 100% transparent. The only way to find out the full cost of a fund at the moment is to ask for a fee calculation.” However he says the industry is moving towards making a total expense ratio part of every fund’s literature. “It is bound to happen eventually,” he says. “After all, everyone is interested in the net results.”
Like most investors, he is not a fan of paying fees on commitments: “I don’t like it at all, although with new managers it is fair to ask for some coverage for the cost of setting up and running the funds.”
Van de Pol is also unhappy with the widespread practice of charging extra acquisition fees: “They should not be there as a separate item – there is always the suspicion that all you are doing is just paying the fund manager a fee for paying the agents!”
He says: “I am a big fan of performance fees that materialise as shares in the fund rather than in cash. This gives the fund managers a real incentive to go for the best performance as the money investors make is the money they make– you can’t get a better alignment of interest than that. But I like performance fees and love to pay them! What matters is that the fees are fair.”
Van de Pol also says fee structures in unlisted vehicles depend very much on fund style.
He says: “In core funds the fees are fairer, whereas in opportunistic funds the fees are not in line with returns. Generally the return expectations are set far too high. People realise that opportunistic returns are becoming harder to find and so are charging with that in mind.”
In the more crowded core funds market, competition between fund managers ensures that investors have a much better deal on fees, he says.
“What matters is that fee structures should be fair,” he says. “As long
as everyone bears this in mind,
fees should not be a matter of contention between investors and fund managers.”
ING GROUP PENSION FUND
The ING Group Pension fund has total assets of around €8bn and a real estate allocation of 7.5% currently. The fund’s asset allocators have recently decided to increase the real estate allocation to 10%. This increase gives the pension fund total spending power €800m in real estate. Until recently, the ING Pension Fund invested exclusively in listed real estate funds with no direct ownership of assets or investment in private funds. However, following a consultation with sister company ING Real Estate, the pension fund decided to adjust the allocation and invest 60% of the total (€€450m) into unlisted funds, in order to have more stability and a closer tracking of the real estate market itself.
The pension fund will invest in both ING Real Estate and third-party products. “We have confidence in our own products but we also appreciate that ING Real Estate is not dominant in every market, so we are maintaining a broader horizon.
So far the fund has invested in 15 different real estate funds and Bijleveld said he expects it to have invested in 25 by the time the programme is finished in 2005, with all committed funds set to be invested by 2007. The fund will maintain its stance of not investing in direct real estate assets.
“With funds for real estate securities, you always end up paying two sets of fees, one for the management of the fund and one for the management of the companies or listed funds your fund has invested in,” says Bijleveld.
“With unlisted funds, I think that fees are generally fair. If you take opportunistic real estate, where we have invested a small part of the total real estate allocation, we are getting IRRs of more than 20% and that justifies the fees investors are being charged. Opportunity fund managers also have to go out and find the opportunities and that costs more than traditional core funds. Also, leverage is higher than average.”
Nontheless, Bijleveld believes hurdle rates, especially in opportunistic funds, could be increased, especially in comparison with core-plus funds. “If they are predicting a 12% total return, for example, then the hurdle rate needs to be set higher than say 9%,” he says.
Fees in domestic funds tend to amount to around 0.6% of net asset value while annual fees of around 0.75% of NAV tend to be the norm in cross-border funds, says Bijleveld. He says he does not like to see fees which are dependent on leverage (ie as a percentage of gross assets). He also objects to fees on commitments: “It is not our intention to pay our managers for uninvested funds”.
“We have quite substantial demands for transparency,” says Bijlevled. “But I think the market is moving in the right direction, especially with the formation of bodies such as INREV.”
The lack of transparency about fees in unlisted real estate funds came as a surprise to Bijlevled. “Having spoken to my colleagues at ING real estate, I am surprised that they do not know more about their rival’s; fee structures. I’m surprised it’s not that transparent. But I understand there will be more convergence as the market develops.”
He says he has not found unlisted funds to be full of hidden fees, but says: “I request a fee survey of all the funds we are looking at.”
In general, he is happy to pay performance fees “the encourage outperformance” and says that in the long run “the level of service is the most important thing, not the fees and fee
NORDEA LIFE AND PENSION
Nordic life insurer and pensions company Nordea, is a long-term investor in real estate. The group, which operates across all four Nordic countries, has e22bn of total assets and 10% in real estate, of which close to 100% is directly-held assets in the Nordic region. The largest direct portfolio is in Denmark.
Over the past 18 months, Nordea has been looking to diversify overseas – mainly into Europe but also looking at Asia and North America - and has begun to make investments in private funds. The money will all initially be new money, although there may be some rebalancing of the portfolio later. Head of international real estate Rasmus Noergaard says: “The main driver of this is diversification, although there may also be the opportunity to find better returns. We will invest indirectly and will eventually have a substantial portfolio, but it is too early to set a specific target.
“We will be more opportunistic than most investors in a similar position; we are not looking to have a balanced portfolio from the outset - if the best returns at the moment are available from southern European retail – that’s where we’ll invest. Over time, of course, we will have a balanced portfolio.”
The group’s first international indirect investment has been in the Aberdeen Property Investors fund of funds, but Noergaard says he expects the first investments in individual funds in the first half of this year.
“The key for me is that the fee structure is fair. It’s not a matter of paying low fees; I think some other investors are focused on squeezing fees to the lowest level,” he says.
“I get the impression that fees have been too high but are coming down to a more fair level. For example fees should not be charged on commitments but on invested equity and we are seeing that more often.”
Noergaard says he does not like transaction fees. “We are not looking to encourage managers to be transaction machines. These fees should be covered by the base fees but with external costs - use of lawyers for example- added.”
Noergaard says, while he is happy to pay performance fees: “The problem with them is that they only align interest on the upside! The only true way to align interest is with co-investment – and it has to be substantial relative to the size of the manager”.
He is also unimpressed with hurdle rates which come in a long way below the fund’s target return rates. “Sometimes you see targeted returns of
10-14% and the hurdle rate set at 7% – to me that’s nonsense! With that level of targeted fees you have at least a hurdle rate of 10%, but you could argue that it should be at 12% if the targeted fee range is 10-14%,” he says.
He believes fee transparency is good with the higher-level fund management and performance fees, but says that working out how lower-level feels, such as property management fees, are charged and why can be harder.
“You also need to look at what other costs can be charged. Often there is no indication of what level these extra costs might reach and no cap on them,” he says. Noergaard believes publication of a total expense ratio would be ideal, but says “I would be concerned that it would not be comparable across funds.”
He also believes that base fees for opportunity funds do not need to be significantly higher than for core and core-plus funds. “The big difference should be on the performance fees. The base fee should not vary a lot with style but I think it still does. Similarly, core funds don’t need to have big performance fees.”
Overall, Noergaard says competition between fund managers is leading to a better deal for investors.