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Changes in the Real Estate Fund of Funds Market

by Forena Akthar

  • 25 May 2011
  • PE
  • RE

Like many real estate firms, fund of funds managers are adapting to changing market conditions and investor sentiment. Increased interest in real estate debt and distressed property has led to the launch of a number of funds of funds focusing on this sector. Metropolitan Real Estate Equity Management raised $162 million for Metropolitan Real Estate Partners 2008 Distressed Co-Investment and the firm is targeting $150 million for its MREP Distressed Strategies II. Core and core-plus funds grew in prominence in 2010 as investors sought to minimize the level of risk in their portfolios and several funds on the road are looking to take advantage of this trend in the market. Pohjola Real Estate Fund of Funds II and Capital Dynamics Real Estate IV Asia-Pacific Core+ are two such examples.

Managers that closed their funds of funds in the last couple of years have yet to deploy a significant proportion of the capital raised, waiting instead for market conditions to improve. These firms are likely to become more active in the coming year, with many firms indicating that they will make underlying investments in the next 12 months.

A number of funds of funds act as investment consultants to institutional investors, and allocate client capital to real estate funds through both managed mandates and separate accounts. The nature of the consultancy services offered varies, and is often tailored around the needs and preferences of clients. Through such mandates, investors acquire fund portfolios that meet their requirements and are managed by firms that specialize in multi-manager investments. UK pension funds often take advantage of such services, and it is likely to appeal to a growing number of investors as they seek more control over their portfolios and take a more proactive approach to investment.

There has been a degree of consolidation within the fund of funds sector. Capital Dynamics assumed HRJ Capital’s fund of funds business in July 2009, and Aviva Investors Real Estate Multi-Manager took over the operations of two real estate fund of funds previously managed by BlackRock Realty in November 2009. In February 2011, it was announced that CB Richard Ellis acquired ING Real Estate Investment Management. Both firms have significant real estate fund of funds divisions and the combined multi-manager business will manage approximately $13 billion (€9 billion). As fundraising remains difficult, further consolidation may occur, with firms of all sizes seeking to take advantage of the benefits of integration and the resulting efficiency savings.

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