Moving in on the affluent

Commonly defined as investors with in excess of €5m of investable assets, HNWIs represent an increasingly important share of the demand for real estate investment products. A study by Albion Strategic Consulting in 2000 estimated there were 7m individuals in the world with €5m to €30m of assets, accounting for nearly €18bn.

The total combined value of private, public and listed vehicles is estimated to be more than €300bn. All three types of vehicle experienced significant growth during the late 1990s. For example, in the UK in 1997 there were 16 limited partnerships. By 2002 this number had grown to over 100.

During the same period the assets of this type of vehicle grew from €16bn to over €42bn. This story has been replicated across Europe and products now range from low risk “core” domestic vehicles to higher risk global “opportunity” fund vehicles.

Although some products are clearly targeted at the retail market, for example German open-ended funds, most available vehicles are designed and structured for institutional investors. While this type of investor still accounts for the lion’s share of capital seeking exposure to the asset class, it is frequently incompatible with affluent private capital.

The appeal of real estate

Even before the recent poor performance of equity markets, high net worth investors have traditionally been attracted to real estate. Many will own several residential properties for their own use and are often more comfortable with having a larger part of their assets invested in this sector than institutional investors with their complex asset liability models.

Many are sophisticated investors and in many respects want to be treated like an institution. They want access to the more innovative products that are only targeted at institutions and, unlike the majority of retail investors, they are typically interested in niche sectors with complex investment stories and the possibility of higher returns.

The challenge for their advisers and investment managers is that such investors commonly have complex tax or domicile issues that are often incompatible with the structure of these vehicles.

One way of providing high net worth investors with tailored solutions for accessing these investment vehicles is through the use of feeder funds. These vehicles allow an investment manager to structure a substantially different vehicle for receiving the capital while giving investors access to a pool of assets or an investment strategy that would normally prove elusive.

Their domicile and tax structure can be designed to suit this type of investor. For example, offshore vehicles can be created to invest in onshore funds, maximising tax structuring opportunities which might otherwise be inappropriate for institutional investors or unnecessary if they are tax exempt.

An example of this would be a tax efficient Jersey-domiciled unit trust created to attract high net worth and offshore capital.

As well as solving apparently incompatible tax differences the use of these vehicles can also be advantageous in marketing. Separate vehicles allow managers and distributors to target their potential client base more efficiently.

Fee structures for institutional investors would often be inappropriate for high net worth investors and the distribution channels typically used to access these investors.

Feeder funds can be priced entirely differently from the main fund and, to the extent that a manager or distributor wishes to further segment his high net worth client base, then more than one feeder fund vehicle could be created.

Everyone’s a winner

The various permutations of these structures are almost endless and the benefits for all involved are clear. An important and growing group of investors gets to access the type of real estate investment product that they really want. Investment managers are able to target more efficiently a larger potential client base and amortise further their cost base. And investment product distributors are no longer stuck between an inflexible product provider and an unsatisfied client.

Simon Foxley is a fund manager at UBS Global Asset Management

Swip offers pan-european product

As real estate becomes a more global, homogeneous asset class, the case for developing a European property portfolio is gathering weight. Anxious not to miss out on this emerging opportunity, Scottish Widows Investment Partnership (Swip) has a hatched a plan to launch its first pan-European real estate fund.

Laidlaw: Swip to offer new fund

Tom Laidlaw, head of property at Swip, says that in the first half of next year he will roll out a new product aimed primarily at affluent investors. He hopes to sell it through private banks throughout Europe.

Hally: ‘property diversification vital’

“The key benefit of investing in more than one country is clearly diversification,” says Ian Hally, Swip’s head of property research. Different countries have different land regimes and rent cycles. In the UK and Ireland, for example, leases tend to be longer than on the continent, sometimes stretching to 25 years. In Sweden, by contrast, leases may be as short as three years.

That said, Swip has conducted a study which concluded that the European market is becoming less differentiated. It put this down to globalisation and the growth of multinational business. In 1975 there were 7000 multinationals. Today there are 40,000, controlling 70 per cent of world trade and swathes of retail, industrial and office properties. Also, the eccentricities within the European property market are decreasing. UK leases, for example, are to be capped at shorter lengths.

Mr Laidlaw has therefore decided that there is a market for a pan-European real estate product. It is likely that the new fund will exclude UK property, since Swip already offers funds covering this market. But otherwise it will be evenly balanced in terms of geography and sector. The fund is to be a closed-ended vehicle and will stop taking in funds once it hits the e4m-e5m mark.

Source: JLL Office Returns, Datastream 1992-2002

– Roxane McMeeken

Foxley: ‘affluent investors overlooked’