As competition for European assets heats up, INREV has revealed the investment strategies, such as geographical diversity, that yield large amounts of uninvested capital
With fund groups locked in competition, many managers are struggling to find suitable properties to purchase.
Research from INREV, the European Association for Investors in Non-listed Real Estate Vehicles, found that liquidity and competition for assets has resulted in many funds sitting on piles of cash.
Mahdi Mokrane, co-author of the INREV Quarterly Research Report on European Non-Listed Real Estate Vehicles, says that the European market is becoming a difficult arena for deploying committed capital.
INREV calculated the level of uninvested capital by comparing the target fund size with the actual fund size on the assumption that groups had been able to raise the amount capital they were targeting from the launch of the fun.
Percentage of invested capital
By dividing the current gross asset value (GAV) by the target gross asset value and multiplying it by 100, INREV calculated the percentage of uninvested capital, or uninvested capital ratio (UCR). This calculation was executed across funds from the INREV database with a target GAV. Of the 490 funds included in the database at the end of 2006, only 286 funds are finite life funds. However, only 128 of those had a target GAV and hence the sample size was 128.
“This is not exhaustive but we believe that it is representative of the finite life funds. The resulting 128 funds have a total current GAV of €49.2bn and a target GAV of €85.8bn,” Mokrane said. Based on these figures, the average UCR is 57.3%.
On average, funds investing in just one country had the lowest level of uninvested capital compared with those investing in the eurozone, Europe or CEE. Jean Bressolle, investment director at IXIS AEW Europe and INREV board member, said that single-country funds tended to be managed by local fund managers who had existing pipelines and thus a greater capacity to invest in their market than managers who had to look at the whole of the eurozone, for example.
In the report, Mokrane said that over the period of 2000-2004, single-country funds appeared to be untouched by investment pressure as opposed to more geographically diverse funds. “This probably means that single-country funds benefit from being more focused, but one should also note that they are on average much smaller funds [average target GAV of €507m] than the diversified funds [average target GAV of €808m],” he said.
He added that over the past year the UCR ratio for single-country funds has in fact increased significantly and is now similar to that of the diversified funds.
“For the multi-country funds, the UCR is probably most stringent for funds targeting central and eastern European countries. This probably reflects the strong increase in the amount of capital seeking investment products in these relatively small markets,” he said.
The research from INREV further shows that funds launched in 2006 have particularly struggled to invest capital, and thus have a higher UCR than funds launched in the six years prior.
Pressure on markets will continue
Bressolle said that the pressure on markets will continue in the next couple of years and believes that funds launched in the past year will be less optimistic and thus, going forward, will have lower UCRs.
Two scenarios explain the phenomenon of funds with a negative UCR. Firstly, the fund may have managed to raise more capital than initially planned, or secondly, the growth in GAB has been such that it has surpassed its target GAV.
Though the INREV research reflects the environment for fund managers in Europe, it is open to question.
In the report Mokrane, warned that the average update date for the information in the INREV database on the 128 funds surveyed was 6 April 2006 and therefore some monies may have been invested by then.
“This probably causes an upward bias in the computation of the UCR, since one may suspect that the latest acquisitions of these funds are not as yet included in the database,” he said.
The INREV Quarterly Research Report looks at changes to the INREV Vehicles Database during the last quarter of 2006. During this time, coverage increased from 281 to 290 vehicles and from €328.5bn of GAV to € 329bn of GAV from the previous quarter.
