Andrew Baum and David Hartzell, Global Property Investment, 2011 Unlisted property funds

Andrew Baum and David Hartzell, Global Property Investment, 2011 What are unlisted funds? Core funds – UK property unit trusts, US/Germany open-ended funds – FCP (Lux), Spezialfonds (Germany) Private equity real estate funds – Usually limited partnerships – ‘Opportunity funds’ Closed ended or open ended? Companies are closed ended Unit trusts are open ended: manager buys and sells units

Andrew Baum and David Hartzell, Global Property Investment, 2011 Investable universe is US$16.6tr Source: PFR, IMF, Pramerica REI, Chin & Dziewulska, 2009

Andrew Baum and David Hartzell, Global Property Investment, 2011 Unlisted market is $2.2tr, or 14% Source : PFR, 2009 Listed vehicles account for $2.5tr, or 16%

Andrew Baum and David Hartzell, Global Property Investment, 2011 PFR unlisted fund universe Regional focusEstimated GAV (US$m)Number Europe (Ex - UK)605, Global (pan-region)454, UK144, North America380, Asia148, Australasia62, Latin America20,67376 Africa7,49826 Middle East4,23819 TOTAL1,828,5222,585 The PFR database covers around 80% of the global market Source: PFR, November 2010

Andrew Baum and David Hartzell, Global Property Investment, 2011 PFR universe by fund style Source: PFR, November 2010 Core/core-plus $696bn, 38% Opportunity/value- added $1,133bn, 62%

Andrew Baum and David Hartzell, Global Property Investment, 2011 Vehicles by style and target region Source: PFR, November 2010

Andrew Baum and David Hartzell, Global Property Investment, 2011 Our definition of core and opp Source: PFR, November 2010

Andrew Baum and David Hartzell, Global Property Investment, 2011 Open-ended dealing secondary market buyers sellers primary market ( manager )

Andrew Baum and David Hartzell, Global Property Investment, 2011 Unit pricing: the bid-offer spread NAV basis – fund net asset value/number of units Offer price – the price paid by an investor on entry Bid price – the price received by an investor on exit Remember: O F F E R is bigger than bid Mid price – bid+offer/2

Andrew Baum and David Hartzell, Global Property Investment, 2011 Example: SEPUT unit pricing Q406 NAV basis – fund net asset value £1,990.10m/number of units 38,165,556 = £52.15 Offer price – the price paid by an investor on entry – NAV plus 4.75% = £52.15* = £54.63 Bid price – the price received by an investor on exit – Offer less 6.25% = £54.63* = £51.21 Bid-offer spread – = (Offer-Bid)/Offer) = (£54.63-£51.21)/(£54.63) = 6.25% Mid price – = (Bid+Offer)/2 = (£54.63+£51.21)/2 = £52.92

Andrew Baum and David Hartzell, Global Property Investment, 2011 Exit routes Open ended funds –Redemption of units by manager –Semi-open-ended: lock-ins, then limited redemptions Closed ended fund, limited life – Total asset sales (or securitisation) at end of life – Fund life extensions of 1-2 years….…or more Closed ended fund, perpetual life – Regular ‘liquidity events’ Joint venture 50:50 structure – Put and call – Mexican shoot-outs, etc What is the manager’s ambition? – :

Andrew Baum and David Hartzell, Global Property Investment, 2011 Core Fully leased multi- tenant property Return: 8-10% Leverage: 0-30% Core-plus Stable lease roll Moderate NOI Upside Return: 11-14% Leverage: 30-50% Value-added Repositioning Moderate redevelopment Return: 16-19% Leverage: 60-65% Opportunistic Distressed sellers Development, significant redevelopment, financial engineering, emerging sectors Return: 20%+ Leverage: 65-75%+ Risk Return Investment styles

Andrew Baum and David Hartzell, Global Property Investment, 2011 Four common legal structures Open/closed ended Listed/unlistedRetail/institutionalMain market CorporateBoth Luxembourg SICAFs, Dutch Bvs/NVs PartnershipClosedUnlistedInstitutionalUS LLP, UK LP, German closed ended ContractualBoth Luxembourg FCP, German Spezialfonds TrustBothUnlistedBothUK/CI Property unit trust

Andrew Baum and David Hartzell, Global Property Investment, 2011 A typical Limited Partnership – fund GP (manager) Property manager Assets held on trust by GP LP agreement Promoter / placement agent Operator/ investment manager (admin, fm) Asset manager Asset management agreement LPs

Andrew Baum and David Hartzell, Global Property Investment, 2011 Source: Property Funds Research, June 2010 Europe (inc UK) market growth

Andrew Baum and David Hartzell, Global Property Investment, 2011 Unlisted funds – recent challenges Launches slowing Gearing reducing Vintage year effect emerging Debt funds, mezzanine popular Disastrous performance stories leaking out Fund extensions Clubs preferred Manager distress –falling fees –fee re-negotiations? –flight to quality

Andrew Baum and David Hartzell, Global Property Investment, 2011 The case for funds

Andrew Baum and David Hartzell, Global Property Investment, 2011 The case for funds Out-sourced management –Specialist management –Motivated management –Aligned management Some retained control –Investment committee Asset level diversification

Andrew Baum and David Hartzell, Global Property Investment, 2011 Diversification is difficult Source: IPD, OPC March 2006

Andrew Baum and David Hartzell, Global Property Investment, 2011 Bad funds Out-sourced management means no control LPs argue with GP – no alignment (LPs pays fees, GP receives them) LPs argue with LPs – recapitalisation, exit Management ceases to be specialist Management not motivated –hungry shop out of the money No alignment – performance fees and utility functions

Andrew Baum and David Hartzell, Global Property Investment, 2011 Good funds Out-sourced management but advisory mandate Specialist management stays that way Motivated management – 50% owner True alignment – fees cover costs LPs do not fall out with LPs (one LP!) GP communicates fully with GP – advisory mandate Multiple exit options: sale, GP finds new LP(s), GP as buyer of last resort

Andrew Baum and David Hartzell, Global Property Investment, 2011 The case against funds

Andrew Baum and David Hartzell, Global Property Investment, 2011 Issues Non-alignment (as before) Secondary market pricing? Gearing The J-curve The drawdown profile

Andrew Baum and David Hartzell, Global Property Investment, 2011 Funds have significant gearing Source: Property Funds Research, January 2009

Andrew Baum and David Hartzell, Global Property Investment, 2011 The J curve and geared returns

Andrew Baum and David Hartzell, Global Property Investment, 2011 The drawdown profile £m Months