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Unlisted property funds

Unlisted property funds. 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

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Unlisted property funds

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  1. Unlisted property funds

  2. 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

  3. Investable universe is US$16.6tr Source: PFR, IMF, Pramerica REI, Chin & Dziewulska, 2009

  4. Unlisted market is $2.2tr, or 14% Listed vehicles account for $2.5tr, or 16% Source: PFR, 2009

  5. PFR unlisted fund universe The PFR database covers around 80% of the global market Source: PFR, November 2010

  6. PFR universe by fund style Core/core-plus $696bn, 38% Opportunity/value-added $1,133bn, 62% Source: PFR, November 2010

  7. Vehicles by style and target region Source: PFR, November 2010

  8. Our definition of core and opp Source: PFR, November 2010

  9. Open-ended dealing secondary market buyers primary market (manager) sellers

  10. 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

  11. 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

  12. 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? :

  13. Investment styles Opportunistic Distressed sellers Development, significant redevelopment, financial engineering, emerging sectors Value-added Repositioning Moderate redevelopment Core-plus Stable lease roll Moderate NOI Upside Return: 20%+ Leverage: 65-75%+ Return Return: 16-19% Leverage: 60-65% Core Fully leased multi- tenant property Return: 11-14% Leverage: 30-50% Return: 8-10% Leverage: 0-30% Risk

  14. Four common legal structures

  15. A typical Limited Partnership – fund Promoter/ placementagent GP (manager) LP agreement Operator/ investment manager (admin, fm) LPs Asset management agreement Asset manager Assets held on trust by GP Property manager

  16. Europe (inc UK) market growth Source: Property Funds Research, June 2010

  17. 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

  18. The case for funds

  19. The case for funds • Out-sourced management • Specialist management • Motivated management • Aligned management • Some retained control • Investment committee • Asset level diversification

  20. Diversification is difficult Source: IPD, OPC March 2006

  21. 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

  22. 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

  23. The case against funds

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

  25. Funds have significant gearing Source: Property Funds Research, January 2009

  26. The J curve and geared returns

  27. The drawdown profile £m Months

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