Real Estate Funds represent over 10% of all Funds registered in Cyprus, as per the latest statistics provided by Cyprus Securities and Exchange Comission. Indirect investment in real estate (hereafter referred to as ‘RE’) through Funds is popular, as it allows investors to access large projects and provides investors with a level of professional management to which they may not have access, should they attempt to replicate the strategy themselves.
Management of a Fund’s RE assets occurs on multiple levels and requires a multi-disciplinary team of professionals. In addition to the financial professionals at Fund level, the involvement of real estate professionals such as civil engineers or lease experts is required at Fund, Asset and Tenant levels.
To highlight the various professionals involved in the management of a RE Fund, we provide a case study. This case study will focus on a “Turnaround Fund” which will acquire a residential block, with the view of converting it into office space, leasing the units and subsequently exiting the strategy via sale at the end of the Fund’s life.
The investment process begins with the Fund Manager who is responsible for setting the investment strategy of the Fund and ensuring that strategy is implemented, to deliver target returns within the relevant risk and time parameters outlined in the Fund’s Prospectus. The investment strategy is set by the Fund Manager’s Investment Committee and is implemented by the Portfolio Managers and overseen by Risk Managers, who will collectively perform what will be referred to in the context of this article as ‘Fund Management.’
The term ‘Asset Management’ will be used to describe the efforts made to maximise a property’s value and returns, and are performed by RE professionals at Fund, Asset and Tennant levels. RE Asset Managers are responsible for various tasks including assistance in the due diligence stage (acquisition and disposal), and oversight of assets during the Fund’s lifecycle. RE Asset Managers and the professionals who support them, may be employed by the Fund Manager or its affiliates (collectively the ‘in-house team’) or outsourced to third parties. RE Asset Managers will take instructions from, and report to, the Fund Manager’s Portfolio Management Function on a regular basis.
Once suitable candidate assets have been identified by the Fund Manager, the RE Asset Manager will perform the necessary due diligence. It is important that the RE Asset Manager is involved early on, to identify any property related shortfalls or risks that might come about, such as inherent (e.g., structural issues) or extraneous (e.g., tenants under rent control legislation).
Upon completion of initial due diligence stage, the Fund Manager and RE Asset Managers will discuss property specifics to ensure that characteristics are reflected in the forecast performance. As the Fund in our example has a turnaround strategy (i.e., the conversion of residential to offices), key metrics would be the Estimated Rental Value (ERV) to be generated by the conversion, and the Captial Expenditure (‘CAPEX’) required for the conversion to offices of the required calibre as per Fund objectives.
Once the property has been deemed as suitable by the Fund Manager and acquisition is complete, the RE Asset Manager will ensure that the execution of the property conversion in line with the architectural plans, CAPEX and timeframes agreed, to ensure returns are maximised.
Amongst the RE Asset Manager’s first direct actions will be the appointment of a Property Manager, who may be part of the in-house team or a third party, to undertake the day to day functioning of the asset. The Property Manager must be involved from the start of the project, ahead of any construction works to ensure procedures are put in place and agreed internally before any actions are taken by leasing agents to attract prospective tenants.
Furthermore, the Property Manager will identify any pre-existing problems (e.g., undocumented consumption of utilities due to absence of utility meters) and act to resolve them well in advance. The Property Manager may also weigh in on the construction works in terms of phasing and developing handover protocols to enable partial occupancy where applicable (i.e., if a multi storey conversion from residential to a commercial building).
The RE Asset Manager will also appoint and oversee the involvement of a Project Manager, who again may be part of the in-house team or a third party, to deliver the refurbished works on time and inform the RE Asset Manager of any potential delays which may impact the investment returns, requiring adjustments to the leasing strategy.
The Fund Manager will actively monitor developments once the building works have been agreed and commenced on site through reports prepared by the RE Asset Manager, concentrating on attracting leasing agents to market the property and securing tenancy contracts. Property Managers will again be involved, dealing with queries from prospective tenants.
Amongst the key objectives given by the Fund Manager to the RE Asset Manager is the maximisation of rent and return of properties owned by the Fund. Therefore, negotiating contracts with estate agents, and implementing a strategy to both attract and retain tenants is crucial. To do so, the RE Asset Manager needs to assess external factors in the wider real estate market to assess competition and trends in the office space sector, and determine the approach in terms of tenancy length, renewal periods and other relevant commercial terms. These are then reported to, and discussed with the Fund Manager, who will in turn factor in micro/macro-economic factors before taking any necessary decisions. The results of insights provided may also be incorporated into the periodic reporting to investors.
Upon completion of building works, Property Managers will shift focus to the needs of committed tenants by assisting them to move into the building, following up on communal areas, implementing preventive maintenance and any ad-hoc requests. In doing so, the Property Manager maintains close rapport with the RE Asset Manager, as the latter will be responsible for communicating the operating expenses (OPEX) for this workstream to the Fund Manager. Such provisions are important, especially where unforeseen expenses might come about as in an extreme weather event, in providing justification should additional funds be required.
The ongoing responsibilities of a Fund Manager will be then diverted to mitigating liabilities and risk, where applicable, and ensuring availability of necessary liquidity to cover both expected or unexpected expenses or Fund level liquidity requirements such as redemptions, distributions, or expenses.
Real Estate Funds require a great deal of work on the development and subsequent management of properties, however the benefits of having an integrated team across the various workstreams cannot be underestimated. Asset, Property and Project Managers provide the Fund Manager with the necessary expertise on demand to ensure all relevant factors are presented for consideration.
An integrated team allows for quick responses where conditions dictate, be that on account of external factors such as market factors or asset related ones. An end-to-end real estate solution improves the likelihood of return maximisation by the Fund Manager and of course investors, through smoother communication channels, established relationships, common internal procedures and reporting, and reduced expenses.
Authors: Alkis Hajittofis FCA, CFA, Executive Director, Resolute Investment Management, Melios Price, Supervisor of Property Management, REInvest, and Panos Hadjichristofis, Director, Resolute Asset Management