14th December 2016
Tougher market conditions are causing some UK
and European fund managers to reassess their
investing timescales. By Robin Marriott
At the end of a tumultuous year, on the surface it seems some normality has returned in terms of real estate investing: the European real estate press is bulging with news of transactions and fund raising.
As a firm with so many real estate clients, this is heartening. However, it is worth tempering expectations in the light of continued challenges, not least for UK opportunistic funds.
A feature of the industry that has not received much airtime (perhaps because it is being played out behind closed doors) is that some fund managers seem to be anticipating a slowdown in the pace of investment.
We hear that in the last 3-6 months some managers of UK/European real estate equity and debt funds have requested from their investors a 1 year extension to the investment period (IP). Meanwhile, some other general partners have added an extra year to the IP in their new fund compared to the previous fund.
This pressure on the IP should perhaps come as no surprise given intense competition for UK assets, more cautious lenders, and market uncertainties generated by sizeable shocks such as Brexit. As they assess a greater number of potential transactions that have become marginal in terms of return expectations, so some managers are starting to plan ahead and make requests for extensions where they feel necessary.
As well as requiring more time to invest, it seems some managers of all types of real estate strategy are also contemplating reduced target returns for the next fund. After polling investors, Preqin’s November 2016 Real Estate Spotlight suggests: “As a result of increased pricing some fund managers are having to adjust the targeted returns of funds they bring to market, typically to reflect lower performance expectations in light of higher entry prices.” Preqin added 37 percent of investors say high prices will have an adverse effect on performance. This is after enjoying high distributions over the past 12-18 months.
Having noted all this, we have clients that are still finding opportunity both in the UK and Europe as evidenced by agreed transactions that are taking place in parts of the UK, Germany, Spain, Italy, and the Nordics for example. Plus, some managers are hoping to progress through the investment period as fast as possible to ensure they can return to fundraising well before any difficulties that might arise in relation to Brexit and marketing.
Yet some UK-focussed fund managers have suggested the current UK market is the most challenging environment they have operated in for several years. In line with this, we are hearing of investment managers kicking the tyres of non-mainstream investments. Niche real estate asset classes, hybrid ‘Infrastate’ assets (meaning assets that share both real estate and infrastructure characteristics) and corporates with large amounts of real estate are bleeping on the radar screens of acquisition teams. This has been the case for opportunistic fund managers in years gone by during similar times of high asset prices for mainstream assets, and it is happening again now in response to the weight of capital pushing yields down.
Turning back to those managers that are seeking an extension to the IP, the question remains how are LPs reacting?
We hear that several North American LPs - who tend to make up the largest chunk of investors in UK/European opportunistic funds – are unimpressed with managers that are rewriting business plans.
Presumably, the way LPs react to requests to extend the IP depends upon the progress of the fund to date. The manager arguably should receive the benefit of any doubt if he can point to successful investments so far in the fund. Should he be blamed for raising a red flag?
After all, it might be the least opportune time for opportunistic funds to invest in the UK. Those GPs that have sought permission for extensions from LPs rather than hiding a weaker pipeline will presumably argue they are doing what they should be doing in the name of good governance, transparency, and communication.
If you would like to discuss this or any other matter, please contact:
Robin Marriott - Business Development Manager
T. +44 20 3597 7940
M. +44 75 5712 3515
Rob Short - Managing Partner
T. +44 20 3597 7900
M. +44 77 7580 6308