Game plan for the global playing field
Hervé Schunke, head of private equity and real estate business development at BNP Paribas Securities Services, looks at the globalisation of real estate investment.
Real estate is one of the oldest forms of investing. However, the nature of real estate investment and fund management is undergoing a transformation. More than ever, investors are looking beyond their local markets to capitalise on emerging opportunities. Meanwhile, fund managers are changing the way in which their funds are structured and operate. While their focus still remains on developed real estate markets, fund managers are increasingly turning their attention to pan-European and global investments.
A global playing field
The sector is opening up in a way that would have been unimaginable only decades ago. According to research by Jones Lang LaSalle, in the first half of 2013 cross-border activity accounted for 42 percent of all commercial real estate transactional activity.
However, for fund managers, new global opportunities also bring new challenges. Managing investments and structures in multiple jurisdictions brings an additional layer of complexity to their activities. Fund managers must come to terms with diverse tax and regulatory environments. They are faced with an array of different reporting requirements, fund and company structures, as well as governance and compliance constraints.
To ease this burden, which can distract from their core competencies, many investment managers are choosing to partner with service providers that can offer global reach combined with specialised real estate expertise. Where regulations differ between jurisdictions, outsourcing can have the added benefit of providing knowledge of local requirements, bringing significant value.
Indeed, the rate of outsourcing of non-core activities in the real estate fund industry has been rising. While levels of real estate outsourcing were as low as 5 percent in 2006, they had risen to an estimated 15 percent in 2009, according to industry figures released in 2012. Though the complex and intricate nature of global real estate investing is one driver, it is by no means the only factor contributing to this trend.
Compression of yields has been a feature of many markets over recent years, increasing fund managers’ focus on efficient operating models. In search of growth opportunities and in order to generate value for their investors, real estate fund managers seek standardised processes to cope with increased volumes.
Partnering with a service provider can allow them to manage their operating costs while ensuring optimum service delivery. In addition, it allows the front office to benefit from the improved quality of data. It also provides a scalable solution, meaning that when volumes increase and as the geographical footprint develops, additional investment in qualified staff and technology is not required, as the service provider can seamlessly handle any extra activity.
Meanwhile, pressure from investors is also encouraging fund managers to outsource a range of non-core functions to independent third party providers. While risk and transparency have always been at the forefront of investors’ minds, in the current context they are of prime concern.
Today, investors seek a greater understanding of their investments and rigor in their reporting. They want to be able to look through the structure of their funds and monitor the performance of the underlying assets. However, many are unable to commit to the substantial investment in the technology required to undertake this in-house.
Meeting new demands represents an increased administrative burden that fund managers may strategically seek to unload in order to apply their fund management skills to their best effect. Through outsourcing, a fund manager can leverage the skills, technology and data management capabilities of a specialised administrator. Partnering with a robust and trustworthy service provider can have the further benefit of adding value in terms of client perception, by enhancing the perceived operational standing and efficiency of the fund manager.
There can be little doubt that the wave of new and complex regulations coming into force, including the Alternative Investment Fund Managers Directive (AIFMD), European Market Infrastructure Regulation, US Foreign Account Tax Compliance Act (FATCA) and Solvency II, is also a driver for change. Regulatory requirements are increasing fixed costs and so prompting fund managers to reassess their operating models, with many embracing variable-cost outsourcing solutions.
The requirement under AIFMD for alternative funds to ensure independent valuation will result in the outsourcing of this function, in many instances, to service providers expert in this task. The depository requirement under the directive will lead fund managers to consider the effectiveness of appointing one provider for combined depository and administration services, to ensure the efficient management of data. Meanwhile, the onerous reporting obligations under FATCA and Solvency II are likely to encourage investment managers to examine the advantages that can be offered by an external provider.
Expanding the outsourcing brief
Beyond investor servicing and fund administration, some fund managers have embraced more comprehensive outsourcing solutions. Keen to focus their skills and resources on managing their investments and generating value for their clients, these fund managers have opted to transfer back- and middle-office staff in a ‘lift out’ of administrative functions to a third party provider.
Besides allowing them to concentrate on what they do best, fund managers also stand to gain in terms of service quality and efficiency. For the service provider, meanwhile the ‘lift-out’ can serve to expand its capabilities through new infrastructure and technology, as well as the transfer of experienced and expert teams. In this regard, the partnership between the fund managers and its service provider is critical in ensuring a smooth transition of duties.
Clearly, these are interesting times for the real estate investment sector. The increasingly global outlook of fund managers and their investments presents new opportunities and new challenges. Investors and regulators, meanwhile, are playing an active role in influencing the shape of the fund management industry.
In this context, many fund managers are redefining their operating model and cost structures. Spurred on by demand, service providers have tailored their solutions to cater to the specific needs of real estate.
Today, robust platforms with advanced technology and expert teams are available to assist real estate fund managers in elaborating an optimal operational structure. Going forward, it is highly likely that those providers who can offer an extended geographical reach and a full range of financing and middle-to-back-office services shall be the team-mate of choice for fund managers in the global game of real estate.