andrew baum and david hartzell, global property investment, 2011 unlisted property funds

Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011

Unlisted property funds

Andrew Baum and David Hartzell, Global Property Investment, 2011

What are unlisted funds?

• Core funds– UK property unit trusts, US/Germany open-ended funds – FCP (Lux), Spezialfonds (Germany)

• Private equity real estate funds– Usually limited partnerships– ‘Opportunity funds’

• Closed ended or open ended?• Companies are closed ended• Unit trusts are open ended: manager buys and sells units


Investable universe is US$16.6tr

Africa $84bn

0%Asia

$4,448bn27%

Australasia $323bn

2%

Europe $5,395bn

33%

Latin Amer-ica

$443bn3%

Middle East$384bn

2%

North Amer-ica

$5,505bn 33%

Source: PFR, IMF, Pramerica REI, Chin & Dziewulska, 2009


Unlisted market is $2.2tr, or 14%

Africa $3bn 0.14%

Asia $376bn

17%Australasia

$114bn 5%

Europe $888bn

40%

Latin America$23bn

1%

Middle East$5bn0.22%

North America$809bn

37%

Source: PFR, 2009Listed vehicles account for $2.5tr, or 16%


PFR unlisted fund universe

Regional focus Estimated GAV (US$m) NumberEurope (Ex - UK) 605,611 906Global (pan-region) 454,279 348UK 144,219 367North America 380,625 464Asia 148,417 269Australasia 62,961 110Latin America 20,673 76Africa 7,498 26Middle East 4,238 19TOTAL 1,828,522 2,585

The PFR database covers around 80% of the global marketSource: PFR, November 2010


PFR universe by fund style

Core$696bn

38%

Opportunity$603bn

33%

Value added$530bn

29%

Source: PFR, November 2010

Core/core-plus $696bn, 38% Opportunity/value-added $1,133bn, 62%


Vehicles by style and target region

Europe &

UKGlobal

North Ameri

ca0

50

100

150

200

250

300

350

400

450

Core/core plus Value addedOpportunity

US$bn



Our definition of core and opp

Europe &

UKGlobal

North Ameri

ca0

50

100

150

200

250

300

350

400

450CORE: Core/core plus OPP: Opportunity/value addedUS$bn



Open-ended dealing

secondary market

buyers

sellers

primary market

(manager)


Unit pricing: the bid-offer spread

• NAV basis– fund net asset value/number of units

• Offer price– the price paid by an investor on entry

• Bid price– the price received by an investor on exit

• Remember: O F F E R is bigger than bid• Mid price

– bid+offer/2


Example: SEPUT unit pricing Q406

• NAV basis– fund net asset value £1,990.10m/number of units 38,165,556 = £52.15

• Offer price– the price paid by an investor on entry– NAV plus 4.75% = £52.15*1.0475 = £54.63

• Bid price– the price received by an investor on exit – Offer less 6.25% = £54.63*0.9375 = £51.21

• Bid-offer spread– = (Offer-Bid)/Offer) = (£54.63-£51.21)/(£54.63) = 6.25%

• Mid price– = (Bid+Offer)/2 = (£54.63+£51.21)/2 = £52.92


Exit routes

• Open ended funds– Redemption of units by manager– Semi-open-ended: lock-ins, then limited redemptions

• Closed ended fund, limited life – Total asset sales (or securitisation) at end of life– Fund life extensions of 1-2 years….…or more

• Closed ended fund, perpetual life– Regular ‘liquidity events’

• Joint venture 50:50 structure– Put and call– Mexican shoot-outs, etc

• What is the manager’s ambition?

– :


CoreFully leased multi-tenant property

Return: 8-10%Leverage: 0-30%

Core-plusStable lease rollModerate NOI

Upside


Value-addedRepositioning

Moderate redevelopment


OpportunisticDistressed sellers

Development, significant redevelopment,

financial engineering,emerging sectors

Return: 20%+Leverage: 65-75%+

Risk

Retu

rnInvestment styles


Four common legal structures

Open/closed ended

Listed/unlisted Retail/institutional Main market

Corporate Both Both Both Luxembourg SICAFs, Dutch Bvs/NVs

Partnership Closed Unlisted Institutional US LLP, UK LP, German closed ended

Contractual Both Both Both Luxembourg FCP, German Spezialfonds

Trust Both Unlisted Both UK/CI Property unit trust


A typical Limited Partnership – fund

GP(manager)

Property manager Assets held on trust by GP

LP agreement

Promoter/placement

agent

Operator/investment manager

(admin, fm)

Asset manager

Asset management

agreement

LPs


02004006008001,0001,2001,400

0100200300400500600

GAV €bn Est GAV €bn NumberNumber

Source: Property Funds Research, June 2010

Europe (inc UK) market growth


Unlisted funds – recent challenges

• Launches slowing• Gearing reducing • Vintage year effect emerging• Debt funds, mezzanine popular • Disastrous performance stories leaking out • Fund extensions• Clubs preferred• Manager distress

– falling fees– fee re-negotiations?– flight to quality


The case for funds


The case for funds

• Out-sourced management– Specialist management– Motivated management– Aligned management

• Some retained control– Investment committee

• Asset level diversification


Diversification is difficult

0.0

2.5

5.0

7.5

10.0

0 50 100

TE (%)

Number of properties

London offices Shopping centres

Source: IPD, OPC March 2006


Bad funds

• Out-sourced management means no control• LPs argue with GP – no alignment (LPs pays fees, GP receives

them)• LPs argue with LPs – recapitalisation, exit• Management ceases to be specialist• Management not motivated

– hungry shop out of the money• No alignment – performance fees and utility functions


Good funds

• Out-sourced management but advisory mandate• Specialist management stays that way• Motivated management – 50% owner• True alignment – fees cover costs• LPs do not fall out with LPs (one LP!)• GP communicates fully with GP – advisory mandate• Multiple exit options: sale, GP finds new LP(s), GP as buyer of

last resort


The case against funds


Issues

• Non-alignment (as before)• Secondary market pricing?• Gearing• The J-curve• The drawdown profile


Funds have significant gearing

01020304050607080

Current gearing Target gearing Permitted gearing

Source: Property Funds Research, January 2009


The J curve and geared returns

0

5

10

15

20

25

1 2 3 4 5 6

INREV IPD


The drawdown profile

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 360

10

20

30

40

50

60

70

80

90

£m

Months

andrew baum and david hartzell, global property investment, 2011 unlisted property funds

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