Taking the indirect route to real estate investmen
Aberdeen Property Investors Indirect Investment Management (APIIIM), a subsidiary of Aberdeen Property Investors (API), is a company dedicated to investing indirectly into property funds on behalf of its large institutional client base. Having been in the indirect property investment market in Europe for the past five years on behalf of its separate account clients, APIIIM has identified the desire from investors to create a pooled fund of funds, enabling both smaller and medium sized institutional investors to get exposure to the rapidly growing market of property funds.
Property as an investment class
As a result of, not only the attractive fundamentals of property investment, but also increased professionalism, transparency and a growing investment universe, property has become an accepted asset class by professional investors. It is widely accepted that property has a place in multi-asset portfolios due to its low correlation to stocks and bonds, its relatively high yield levels, its low risk anchored by the physical buildings etc. However, the traditional way for large investors to obtain property exposure through direct ownership has some disadvantages. For instance, having an organisation to manage the properties and the portfolio entails a large in-house commitment relative to other kinds of assets not least if one wants an internationally diversified portfolio. In addition to this, a large amount of capital is required to build up a well-diversified portfolio.
Investors also commonly accept that the listed property sector is not the ultimate substitute, due to its high correlation with the wider stock market. Instead property funds are increasingly being used by investors. The property funds market has grown considerably during the past few years, providing investors with a greater choice of strategies, markets and managers. Most property funds have the benefit of being tax efficient and not being influenced by short term movements in the stock markets as liquidity is limited, prohibiting investors from quickly moving in and out on a speculative basis, resulting in that the investment form resembles that of direct property investments.
Pooled property fund of funds
Although there are many advantages to investing through property funds, one possible restriction is the minimum commitment amount that most fund managers require. This minimum amount is usually between €10-20m. As diversification is not only important in terms of sectors and geography, but also in terms of fund managers, investment styles and strategies, a well diversified international property portfolio should be diversified over at least eight-10 funds. Thus, an international portfolio of funds would have to be in excess of €80 million in commitments, which for some investors may be an excessive sum.
Another factor that may discourage investors from investing in property funds is lack of experience and knowledge. The European market for un-listed property funds is still highly opaque and although INREV have improved transparency, it still has some way to go. Just to build up and maintain a database of funds currently available for investment is very time consuming and it is critical to continuously meet the teams and listen and compare stories in order to distinguish a unique strategy or a unique team from a less so. It is also crucial to build up sufficient knowledge and resources to be able to conduct proper due diligence on short listed funds and its managers. Not only should one investigate the strategy, deal pipe-line, execution ability, team and track record of the managers, but the fact that there are no standardised structures in the market also means that investors have to spend a considerable amount of time to understand the structure of the fund and the mandate of the manager. Although this by no means demands an internal organisation comparable to that of direct property investment, it still requires a dedicated team in order to maintain the focus required. For an investor to build up this expertise internally takes time, costs money and is not very flexible.
As a result of these concerns it is desirable for the market to create a vehicle that pools together likeminded investors to create economies of scale and access a diversified portfolio of property funds by investing through the same vehicle managed by a manager specialised in the area of indirect property investment. This “pooled fund of funds“ vehicle can also be used by larger investors as a core exposure to which other fund investments are added to achieve the desired risk and return profile or just in order to minimise the use of internal resources.
One of the first potential drawbacks raised by investors with regards to pooled fund of funds is usually the one of ‘fees on fees’. This is of course a valid point and the fees for fund of funds should be considerably lower than for direct property funds. Ideally the fees to the manager of a fund of funds should be recovered through the cost savings of having economies of scale in the due diligence and monitoring process as well as by tax efficient structuring. However, equally important is that the fund of fund manager is able to have greater influence on fund managers with regards to negotiating terms, conditions and strategies.
Aberdeen Indirect Property Partners
Following what was originally a request from a number of leading institutional investors, APIIIM is now launching a Luxembourg based pooled fund of funds to be managed by its dedicated team of seven professionals. The fund, Aberdeen Indirect Property Partners, is a euro-denominated property fund of funds vehicle which will invest in funds investing in European property. The overall objective of the fund is to pool together institutional investors of varying nationalities to create a well-diversified property exposure across Europe. The total number of target funds is expected to be in the region of 8-15 and diversification will be achieved by investing in different property funds by:
ncountries and cities;
The fund is being established as a Luxembourg FCP, which is a proven and tax transparent
vehicle regulated by the CSSF in Luxembourg, and has been structured together with three well known lead investors who have all actively participated in setting the strategy, terms and conditions of the fund. The fund, which already has commitments in excess of €150m, will be open for new investors during the course of 2005. The fund will seek to deliver a net IRR of between 10-14% to investors by primarily investing in property funds focusing on the core-plus segment of the market and where income return will be an important component of the
The fund will benefit from APIIIM’s established investment process and proven track record of indirect investments in Europe. APIIIM is one of Europe’s leading indirect property investment managers, having a fully established investment process and holding some of Europe’s largest mandates for indirect property investments. In 2004, APIIIM analysed more than 60 Continental European property funds and made ten fund commitments, totalling €184m, on behalf of its separate account clients. As APIIIM continuously is investing in the market it already has a strong investment pipe-line of target funds and expects to make a number of investments on behalf of the fund during the early course of 2005. APIIIM currently have European investment mandates in excess of €1bn on behalf of several institutional investors, providing its clients with a strong position in the market.
For further information please contact:
Tomas Otterud: +46 8 412 86 40, firstname.lastname@example.org
Anders Åström: +46 8 412 80 65, email@example.com