Division of labour creates economies of scale and thus efficiency gains - this truth has been at the heart of economics since the days of Adam Smith and David Ricardo. Only in recent years has it gained momentum in the world of real estate funds.
While the division of labour between fund initiators, capital management companies and institutional investors can be seen as one of the most significant trends, it remains one of the most underestimated trends in the industry as well.
The implementation of the European AIFM Directive (Alternative Investment Funds Managers Directive) in 2011 can be seen as the starting point for the transition to a greater degree of specialisation. The requirements in the Directive have increased the cost of obtaining an AIFM licence to a point such that a licence often no longer is viable for smaller fund boutiques. As a result, the use of ManCos has become even more popular for tangible assets such as real estate.
Growing number of specialised products and players
The increasing professionalisation of real asset funds is also supported by other developments in the industry, such as the growing importance of real estate investments in the low interest rate environment of the last decade. And even in the current market, Real Estate continues to be an interesting part of client portfolios. New fund concepts, such as focusing on data centres or healthcare properties, increasingly require specialist expertise.
Asset classes that were once considered niche markets have recently become popular with investors. They promise higher potential returns than traditional favourites such as residential and offices. Newly popular assets range from logistics and light industrial properties to social and care properties, micro-housing and healthcare, data centres and, more recently, life sciences and cell towers. The real estate market is thus becoming more and more differentiated, which is also reflected in an increasingly specialised range of funds on offer. This specialisation also applies to the fund initiators themselves and their product ideas - often relatively small or newly established boutiques with innovative investment approaches. With comparatively low levels of total net assets, an individual licence is not worthwhile for them, so fund administration is increasingly being outsourced to ManCos.
Higher levels of professionalisation drive trend
ManCos take advantage of the fact that the complex expertise required is scalable. They can focus on the administrative tasks and continuously increase their efficiency through ongoing optimization and automation, while fund initiators can concentrate on their core tasks: raising capital and making strategic investment decisions. Without ManCos, many innovative product ideas would probably not even be implemented by the boutiques.
We are certain that this trend will continue and even intensify, as each new regulatory step increases the complexity and thus the costs of fund administration. As a result, the minimum threshold of fund assets required to justify a ManCo licence is also increasing.
Even in times of rising interest rates, real estate as an investment will remain in demand by institutional investors over the long term – and the specialisation and differentiation of the asset class will continue. At the same time, the complexity of regulation will continue to increase, not least in the area of sustainability. This will also create the conditions for further professionalisation and division of labour in the real estate fund industry. We will certainly see a lot of exciting developments happening over the coming years.
Dr Sofia Harrschar is country head Luxembourg at Universal Investment, a knowledge partner of Investment Officer Luxembourg.
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