Updated with clarification on Jan. 29
Many private equity-style real estate funds sold to institutional investors are charging too much, according to consultant Towers Watson.
It's possible that widespread use of unfair fee structures could keep some of these big buyers from taking advantage of distressed sales of commercial property, the firm said.
“I think the fees may well have an impact” on transactions, said Douglas Crawshaw, a Towers Watson senior investment consultant.
Observers of the commercial real estate market said more sales by banks and others are needed to help the segment find a price bottom.
In a report released today, Towers Watson faulted institutional real estate investment managers for having opaque fee structures that can disadvantage investors.
These funds, structured like private equity funds, often charge management fees of up to 2%, the report said.
Towers Watson urged managers to charge no more than 1.5%.
Managers also base fees on commitments from investors rather than on invested capital, and on gross asset values instead of equity, which may encourage overleveraging, the firm said.
Various incentive fees also disadvantage investors, the report said.
High and complicated fee structures “make us much less positive on backing many of the vehicles that are actually available for clients to invest in,” Towers Watson said in the report.
“We want to create a situation where there is better alignment” between the managers' and investors' interests, Mr. Crawshaw said. That would create “greater confidence in the asset class.”
More institutional investors are looking to make commitments to real estate, Mr. Crawshaw added. Firming prices have helped, especially in Europe and the U.K. where commercial-property values staged a rebound in the fourth quarter of 2009, he said.
Dan Jamieson is a senior editor at InvestmentNews, a sister publication of Pensions & Investments