Managers alter models to keep their investors happy

Real estate managers are tweaking their models, turning to joint ventures and other arrangements with asset owners and operators to generate capital and deal flow.

No longer are investors happy committing capital blindly to commingled funds that come with hefty fees. Instead, they want more control, and some say on the type of portfolio, to gain access to a specific sector or region or type of property.

Real estate money managers have gotten the message, and are changing their business models to meet this new demand, switching to more creative mixtures of how they make investments.

Funds-of-funds managers have become especially fond of joint ventures that include institutional investors and sometimes also operating partners to invest in buildings or portfolios. Real estate managers are investing in assets and limited partnership interests on the secondary market to focus on investing jointly with new and existing investors and operating partners on a deal-by-deal basis.

CBRE Global Investors' funds-of-funds business model changed so much that it altered the fund-of-funds' group name earlier this year.

It's not only funds-of-funds managers that are modifying the way they do business. Many of the largest real estate managers — including Blackstone Group and TIAA-CREF — are hooking up with real estate investment trusts and other so-called operators that manage the properties, find tenants and oversee property improvements, for proprietary deal flow and operational expertise. At New York-based TIAA-CREF, joint ventures with major global investors on trophy U.S. properties were a major source of its asset growth in the year ended June 30.

A number of institutional investors have formed joint ventures with real estate money managers and real estate operators to buy portfolios or invest in trophy buildings around the globe. They include joint ventures between the Toronto-based C$219.1 billion (US$201.6 billion) Canada Pension Plan Investment Board and real estate money manager Hermes Investment Management Ltd.; Norges Bank Investment Management — manager of the 5.5 trillion Norwegian kroner ($887.2 billion) Norwegian Government Pension Fund Global, Oslo — and real estate manager AXA Real Estate; and Norges Bank Investment Management and real estate investment trust Prologis Inc.

Earlier this month, NBIM paid €12.4 million ($15.82 million) for its 50% stake in a portfolio of logistics properties in Norway through the Prologis partnership. Norges also bought the trophy BofA Merrill building in London through its joint venture with AXA Real Estate.

These joint ventures are turning into a bigger source of capital for money managers.

In the 12 months ended June 30, TIAA-CREF invested more capital in joint ventures with major global investors on trophy U.S. properties than it had in past years, said Philip McAndrews, senior managing director and chief investment officer, global real estate, New York. TIAA-CREF now has more than $6 billion invested in joint ventures mainly with foreign investors investing in the U.S. and the firm expects that number to exceed $7 billion by year-end, Mr. McAndrews said.

“These investments reflect the relatively stronger growth trajectory of the U.S. and the attractiveness of dollar-denominated investments to global investors,” and is an area of growth at TIAA-CREF, Mr. McAndrews said in an e-mail.

In May, TIAA-CREF acquired — through TIAA Henderson Real Estate, a joint venture between TIAA-CREF and real estate money manager Henderson Global Investors — the J.K. Iguatemi Mall in Sao Paulo, Brazil.

TIAA-CREF also has partnered with APG Asset Management — which oversees the €325 billion ($417.49 billion) assets of the ABP pension fund Heerlen, Netherlands; Australia's A$96.6 billion (US$90.9 billion) Future Fund; NBIM; and the CPPIB.

Some real estate money managers say their newly modified models represent a permanent change to the way they do business.

In September, Los Angeles-based real estate money manager CBRE Global Investors changed the name of its funds-of-funds business to CBRE Global Investment Partners from CBRE Global Multi Manager to reflect a change in its business model, said Jeremy Plummer, CEO of CBRE Global Investment Partners in London. The group has $13 billion in assets under management.

The switch in business model at CBRE is telling. Before the financial crisis, most of CBRE Global Investment Partners' business was managing funds of funds, Mr. Plummer said. Today, funds of funds are out of favor and the post-crisis investment strategy of investing on the real estate secondary market has “played out,” he said.

In the last 12 months, co-investments grew to represent 60% of the group's portfolio, up from 50% before the 2008 financial crisis, with $1.5 billion in co-investments in the last 12 months.

Larger transactions in the deal-by-deal model sometimes involve more than one investor, with CBRE pooling capital from a variety of sources including separate accounts and co-investments, Mr. Plummer said. This arrangement gives each investor lower fees than a commingled fund and discretion to invest on a deal-by-deal basis, he said.

Funds-of-funds firms in general are changing their business models to invest directly in properties with investors, said Nancy Lashine, managing partner and founder of New York-based placement agency Park Madison Partners LLC.

Investors lost interest in real estate funds of funds because of a combination of underperformance of some fund-of-funds and a double set of fees — paying the fund-of-fund managers and the managers of the underlying real estate funds, she said.