On a very blustery, autumnal morning in September, AREF Affiliate, Greenberg Traurig, kindly hosted this event in their splendid offices in The Shard. It was another one of our regular events, in partnership with the Real Estate Investors’ Forum and PropertyMatch, exclusively for our Investor Members. Pension funds and charities (and their advisers), multi-managers, wealth managers etc., the investors in our member funds, are invited to come together to discuss topical issues at such events in a relaxed format. On this occasion, they were discussing the ‘Challenges for Institutional UK Balanced RE Funds in Attracting Global Investors’.
For such a weighty topic we had two very worthy speakers: John Benham, Managing Director at Blackrock and fund manager of their behemoth balanced fund; and Lindsey Hammond, Senior Portfolio Manager at CBRE Investment Management, Indirect Private Real Estate.
Among the challenges discussed, it seems one of the prominent issues for managers trying to attract fresh capital into their funds has been simply how the UK itself is perceived by overseas investors. Uncertainty caused by Brexit on a number of levels and political disarray have taken their toll.
That said, it was agreed that UK real estate does offer the most transparent property market globally, income profiles are stable and it offers good diversification on a global perspective, with cities in the UK displaying low correlation to cities around the world. It was also thought that valuations pass through well, effectively marking to market relatively more efficiently. Furthermore, the UK property market is much more liquid than most other markets. In some cases, liquidity only becomes available to investors once in five years. This last point is perhaps notably contrary to the unfortunate perception typically portrayed by the UK’s own press.
For all the merits though, it remains challenging to attract global investors into established UK balanced funds. The core/core-plus returns they offer are often not enough, with many global investors seeking around 10-11% per annum. Should fund managers seek to achieve that to attract this fresh capital? And what risk would that put on shift and drift of investment style and strategy? Not least of all the risk to the standing investors that have bought into the current, very familiar approach.
The use of gearing remains normal practice globally, at levels around 20-30%. In the UK, it’s limited use in balanced funds diminished as a consequence of the GFC back in 2008 and has not been reengaged since. Given the cost of debt presently, it seems unlikely to be available to boost returns for any balanced funds anytime soon either.
If attracting capital from more ‘active investors’, with their penchant for enhanced leverage holds the greatest challenges, perhaps the answer lies more with the more ‘passive investors’. These investors are looking for more beta-style exposure and tend to have a greater need for liquidity. It was suggested that the qualities of the UK real estate market seemed to fit with these investors rather well.
The gross asset value of the Global Real Estate Fund Index has grown from around US$180bn in December 2005, to just under US$956bn by June 2023. For perspective, according to data from CBRE and Oxford Economics, the global investible universe for real estate is estimated at around US$38trn. There may not be any quick and easy solutions to attracting global investors’ capital but notwithstanding the challenges, the size of the prize for UK balanced fund managers is plain to see.
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